TABLE OF CONTENTS
1. Introduction p.4
2. The Groceries Order - Legal Background p.7
3. The Fair Trade Commission Report 1991 p.17
4. Summary of Submissions on the Groceries Order p.20
5. Independent Study on Impact of the Groceries Order p.34
6. Arguments in favour of retaining the Groceries Order p.39
7. Arguments against retaining the Groceries Order p.77
8. Conclusion and Proposals p.95
Appendix A Report of DKM Economic Consultants Limited entitled “Economic Impact on the 1987 Groceries Order”.
1 FOREWORD
One of the faintly bizarre aspects of the public policy debate on competition law is the passion aroused by the only left-over remnant of the old Restrictive Practices regime, namely the Groceries Order. Its best known feature is the ban on below invoice price selling (commonly, if somewhat inaccurately, referred to as 'below-cost-selling') and it is this feature which arouses the most controversy. However, as highlighted in particular in Chapter 6 within, some of the other provisions of the Groceries Order (such as those relating to suppliers’ terms and conditions and the ban on “hello” money, sometimes referred to as “fair trade” provisions) are also capable of generating controversy.
A further peculiarity of the debate on the Groceries Order is that its legal status is such that it cannot be amended. It can only be either left intact or repealed in its entirety. As explained in Chapter 2 within, this is because the order was made under the Restrictive Practices legislation which was repealed by the Competition Act 1991. The Commencement Order bringing the 1991 Act into force seems to have created an exception in relation to the repeal of the Groceries Order which would otherwise have followed. However, since the parent legislation has been repealed, no variation of the existing Groceries Order can be introduced within the Restrictive Practices framework. Among the arguments canvassed in the within discussion document is the possibility of repealing the Groceries Order but introducing specific legislation to deal with such aspects of the grocery trade as are thought to warrant some form of “fair trade” regulation.
As noted in the conclusion section within, the Review Group was divided on the question of whether or not the Groceries Order should be repealed. This reflects a division which has been apparent for many years in the debate which has taken place within industry and amongst academics on the Groceries Order. Some may find it puzzling as to why prolonged debate among rational, intelligent and well-intentioned persons over the years has been unable to produce a consensus. In part, this may be explained by the fact that, as noted in the independent report by DKM Economic
2 Consultants Limited (Appendix A), much of the empirical data which would be necessary to pronounce definitively on the issues raised is simply not available. Another explanation proffered in the within discussion is that the Groceries Order is favoured (though not exclusively) by particular and focused interest groups whereas those against the Order have no sharply defined point of opposition. Advocates of its abolition therefore tend to be economists, both academic and in independent practice. Whatever may be the true explanation for the divergence of views on the Groceries Order, it is fair to say that this divergence was mirrored amongst the members of the Review Group.
The Groceries Order is not specifically mentioned in the Review Group’s terms of reference. It is only of relevance to the Review Group’s work insofar as it bears upon the effectiveness of competition law.
The Groceries Order is the single topic upon which the Review Group received the most submissions. The arguments for and against are canvassed extensively in the within discussion document. While comments and submissions are invited, as set out in the introduction, in accordance with our customary procedure, it would be helpful to the time scale of the work of the Group if further submissions in respect of the within document were restricted to points that have not been adequately ventilated already in the submissions to the Review Group and in the within document, as distinct from merely repeating points which have already been made.
Michael M. Collins Chairman Competition and Mergers Review Group December 1999
3 1. Introduction
The terms of reference of the Competition and Mergers Review Group are: to review and make recommendations on:
! the mergers legislation in the context of legislative consolidations; ! the effectiveness of competition legislation and associated regulations; ! cultural matters in the context of the Competition Act, 1991 and in particular Section 4(2) of that Act; and ! appropriate structures for implementing the above legislation.
The Group, chaired by Mr. Michael Collins S.C. is currently made up of the following members: IBEC Mr. Owen Killian Mr. Myles O’Reilly ISME Mr. Robert Berney ICTU Mr. Paul Sweeney The Bar Council Mr. David Barniville The Law Society Mr. Gerald FitzGerald Consumers Association of Ireland Mr. Peter Dargan Department of Enterprise, Trade & Employment Mr. Barry Harte Economist Mr. Moore McDowell Office of the Attorney General Mr. Damien Moloney
The Group has published three discussion papers.1 This discussion paper focuses on the Restrictive Practices (Groceries) Order, 1987 (the “Groceries
1 The first discussion paper, published in July 1998, contained proposals for discussion in relation to mergers. The second discussion paper, published in February 1999, contained proposals for discussion in relation to some recommendations of the Report of the Commission on the newspaper industry. The third discussion document, published in September 1999, contained proposals for discussion in relation to competition law and is primarily concerned with possible legislative changes which might assist in improving the effectiveness of competition law in Ireland.
4 Order”) 2. The Group’s examination of the Groceries Order arises from the context of its review of the “effectiveness of competition legislation and associated regulations” in its terms of reference.
The Group published advertisements which called for submissions from the public on issues relevant to its terms of reference. Several submissions were received concerning the Groceries Order. The submissions by number of these interested parties will be referred to and considered later in this paper. Submissions were received on the Groceries Order from the following:
1. IBEC - Competition Council; 2. IBEC - Food, Drink and Tobacco Federation; 3. Irish Co-Operative Organisation Society Limited; 4. Barry Doherty (a member of the European Commission Legal Service but writing in a personal capacity); 5. Irish Farmers Association; 6. RGDATA, IADT and SSRF; 7. An Bord Glas (Horticultural Development Board); 8. A fruit and vegetable distributor; 9. Dr. Patrick Walsh and Ms. Ciara Whelan (Department of Economics, Trinity College, Dublin); 10. Dr. John Fingleton (Department of Economics, Trinity College, Dublin); 11. Competition Authority; 12. William P. Fagan (Former Director of Consumer Affairs).
Following a meeting of the Group in February 1999 it was agreed that the Group should retain an economist to carry out a study on the economic impact of the Groceries Order and to report to the Group with the results of that study. It was agreed that the study should be conducted by an economist who was totally independent and who was not perceived as having previously taken a position in relation to the Groceries Order. DKM Economic Consultants Limited (“DKM”) was retained to carry out the study. DKM initially reported
2 S.I. No. 142 of 1987.
5 to the Group in August 1999 and presented its final report in October 1999. DKM recommended that the Groceries Order should be repealed in its entirety. The nature and extent of the study by DKM and its conclusions will be addressed later in this paper. A copy of the DKM report is to be found at Appendix A.
Following a meeting of the Group to discuss the Groceries Order, and in particular, the DKM report, a member of the Group, Myles O’Reilly (Secretary to the IBEC Competition Council) agreed to prepare a paper which would set out the arguments in favour of the retention of the Groceries Order. A slightly amended version of Mr. O’Reilly’s paper is included as Chapter 6 of the present document. It reflects the IBEC submissions and comments on the DKM report. Chapter 7 contains contrary arguments based largely on the work of two economists, Patrick Walsh and Ciara Whelan who have extensively analysed the Groceries Order and have argued for its abolition. Dr. Walsh and Ms. Whelan also made submissions to the Group.
This discussion document will commence with an examination of the terms of the Groceries Order. It will then refer to and briefly consider previous studies. It will then summarise the submissions made to the Group by various interested parties and bodies. It will then refer to and consider the DKM report. A summary of the arguments for and against retaining the Groceries Order follows as referred to above3. The paper concludes with the Group’s draft proposals for discussion.
Comments and submissions on the within proposals should be made in writing to the Secretary of the Group, Ms. Grace O’Regan at the Department of Enterprise, Trade and Employment to arrive on or before Monday the 24th of January 2000.
3 It will be appreciated that Chapters 6 and 7 do not, in themselves, reflect the views of the Group as a whole but rather summarise the respective positions of those for and against retaining the Groceries Order.
6 2. The Groceries Order - Legal Background
The Groceries Order was made by the then Minister of Industry and Commerce in exercise of powers conferred by Section 8 of the Restrictive Practices Act, 1972 following a review of the operation of the earlier Restrictive Practices (Groceries) Order, 1981 by the Restrictive Practices Commission. Prior to the report of the Restrictive Practices Commission which led to the making of the Groceries Order, 1987, there had been five previous formal enquiries or reviews of the groceries trade in Ireland by the Fair Trade Commission and by the Restrictive Practices Commission. The following reports were published following those enquiries/reviews:
1. Fair Trade Commission: Report of Enquiry into the Conditions which obtain in regard to the Supply and Distribution of Grocery Goods and Provisions (Stationery Office, Dublin 1956) Pr 3722;
2. Fair Trade Commission: Report of a review of the operation of orders relating to the Supply and Distribution of Groceries (Stationery Office, Dublin, 1966) Pr 8896;
3. Fair Trade Commission: Report of Enquiry into the Conditions which obtain in regard to the Supply and Distribution of grocery goods for human consumption (Stationery Office, Dublin, 1972) Prl 2517;
4. Restrictive Practices Commission: Report of Special Review by means of Public Enquiry of the operation of Articles 2 and 3 of the Restrictive Practices (Groceries) Order, 1973, as amended by the Restrictive Practices (Groceries) (Amendment) Order 1973 (Stationery Office, Dublin, 1975) Prl 5274;
5. Restrictive Practices Commission: Report of Enquiry into the Retail Sale of Grocery Goods Below Cost (Stationery Office, Dublin 1980) Prl 9428; 6. Restrictive Practices Commission: Report of review of Restrictive
7 Practices (Groceries) Order, 1981 (Stationery Office, Dublin 1987) Pl 4678;
7. Fair Trade Commission: Report of review of the Restrictive Practices (Groceries) Order, 1987 (Stationery Office, Dublin, 1991) Pl 8304.
In addition, the OECD in its 1993 Economic Survey of Ireland favoured rescinding the Groceries Order.
The purpose of this discussion document is not to review or consider Orders previously made in relation to the grocery market under the Restrictive Practices Act, 1972 and its predecessors. The report of the Fair Trade Commission on the Groceries Order published in 1991 summarises the results of the earlier enquires and reviews4. One or two points however should be made. The prohibition of resale price maintenance was first introduced following the report of the Restrictive Practices Commission in 1956. Advertising of below cost sales of products was first introduced in 1973 following the report of the Restrictive Practices Commission in 1972. Advertising of below cost sale of grocery products was prohibited for the first time following the report of the Restrictive Practices Commission in 1980. However, below cost selling of grocery products was not prohibited until the 1987 Groceries Order. The prohibition on the payment of “hello” money was prohibited for the first time in the 1987 Groceries Order.
1987 Groceries Order
Article 2 is the definition section. “Grocery goods” are defined so as to
4 FTC1991 Report Paras 1.2-1.11
8 exclude fresh food, fresh vegetables, fresh and frozen meat, fresh fish and frozen fish which has not been processed. The term includes grocery goods for human consumption (with the exception of those goods just referred to) and intoxicating liquors not for consumption on the premises. It also includes “household necessaries” ordinarily sold in grocery shops.
Article 3 contains the prohibition against resale price maintenance. Suppliers and wholesalers are prohibited from (inter alia) requiring or inducing any person to resell or offer for resale grocery goods at a fixed price or a price not less than a fixed or minimum price or a fixed mark-up or a fixed discount or a mark-up not less than a fixed or minimum mark-up or a discount not greater than a fixed or maximum discount specified by the supplier or wholesaler or established by agreement or otherwise5. Article 3(2) makes it clear that there is nothing to prevent a supplier from advertising or otherwise specifying retail prices for grocery goods provided such prices are maximum prices or withholding grocery goods from a wholesaler or retailer in certain cases such as where the wholesaler or retailer has sold grocery goods supplied by the supplier at a price exceeding the maximum retail price specified by the supplier6.
Article 4 provides that where a supplier indicates or recommends a retail price of grocery goods such a price is not binding on any person as a minimum resale price.
Article 5 prohibits “arrangements, agreements or understandings” between suppliers, wholesalers or retailers which have or are likely to have the effect of ensuring that goods will be resold or offered for resale at a fixed price or a price not less than a specified minimum price or at a fixed mark-up or at a mark-up not less than a specified minimum mark-up or at a fixed discount not greater than a specified maximum discount or on any other basis which involves eliminating or limiting competition in price between suppliers or
5 Article 3(1). 6 Article 3(2).
9 between wholesalers or between retailers.
Article 6 precludes agreements, arrangements or understandings between two or more suppliers or between two or more wholesalers as to prices at which they will supply grocery goods to other persons or as to discounts to be allowed or mark-up to be applied in respect of such goods.
Article 7 prohibits suppliers or wholesalers from withholding grocery goods from any person or from discriminating against any person as to the terms on which such goods are supplied because that person is or is not a member of a trade association or is not approved of by a trade association or because such person’s name either appears or does not appear on a list prepared, maintained, published or issued by a trade association or because of representations made concerning the withholding of supplies or the terms on which supplies should be made to such person by or on behalf of a trade association.
Article 8 precludes a trade association or a combination of persons from coercing or inducing a supplier or wholesaler to withhold supplies of grocery goods from any wholesaler or discriminating against any wholesaler or retailer as to the terms on which such groceries may be supplied to them.
Article 9 precludes agreements, arrangements or understandings between suppliers, wholesalers or retailers which have or are likely to have the effect of limiting or restricting entry to trade any grocery goods.
Article 10 prohibits lists or other acts designed to secure a boycott of persons in relation to grocery goods because of prices charged by that person for goods or other terms or conditions on which goods are supplied by that person or which are designed to affect adversely the terms of supply of goods to any person because that person has refused to do any act which he is prohibited from doing by the terms of the Groceries Order.
The prohibition against below cost selling is contained in Article 11. Under
10 Article 11 a retailer is prohibited from selling grocery goods (except in very limited circumstances in the case of goods whose date of minimum durability has expired) which is less than the net invoice price of the goods (including value added tax) or where charges in respect of carriage, insurance and other costs not included in the relevant invoice have to be paid by the retailer to the supplier to obtain delivery of the goods to his premises. The amount obtained when such charges or costs are added to the net invoice price of the goods (including value added tax)7.
Article 12 prohibits retailers or wholesalers or other persons acting on behalf of retailers from publishing or displaying or advertising the sale of grocery products at below cost (the cost being determined by the net invoice price of the goods (including value added tax)8. Where charges for carriage have to be paid by the retailer, the cost is the amount obtained when such charges or costs are added to the net invoice price of the goods (including value added tax).
Article 139 requires suppliers to prepare and maintain a written statement of the terms and conditions on which and subject to which they sell grocery goods. Suppliers are obliged to sell grocery goods to wholesalers and retailers on and subject to those terms and conditions. This requirement does not apply in the case of a sale of goods which have been processed, packed or otherwise prepared to the specification of the purchaser and which are not given the name or brand name of the supplier10. Article 13(2) provides that the supplier’s terms and conditions may make provision for discounts or rebates having regard to certain criteria. Article 13(3) provides that supplier’s terms and conditions may not discriminate unfairly against the purchasers.
Under Article 14 a supplier must, if requested by the Director of Consumer
7 Article 11(1). 8 Where charges for carriage have to be paid by the retailer, the cost is the amount obtained when such charges or costs are added to the net invoice price of the goods (including value added tax). 9 Articles 13-18 contain the so-called "fair-trade" provisions. 10 Article 13(1)(c). This sub-paragraph appears to obtain a typographical error in that the sub- section refers to the “purchaser” whereas it would appear clearly to be intended to refer to the “supplier”.
11 Affairs, provide a copy of the statement of its terms and conditions. Retailers with more than five grocery outlets and wholesalers are also obliged to furnish to the Director of Consumer Affairs a statement of supplementary terms negotiated with suppliers
Under Article 15 (as amended) a supplier may be obliged by the Director of Consumer Affairs to amend any of its terms and conditions which the Director regards as constituting unfair discrimination in favour of or against any wholesaler or retailer or any section of the grocery trade.
Under Article 16 wholesalers and retailers are precluded from causing whether by the use of threats or inducement or otherwise suppliers to sell grocery goods on terms and conditions other than those contained in the suppliers’ statement of terms and conditions. Wholesalers and retailers are required to comply with terms and conditions as to credit which are contained in suppliers’ statements prepared under Article 13 of the Groceries Order11. However, it is an offence for a person who does not comply with such terms or conditions as to credit that such failure is due to that person’s inability to pay for the goods in accordance with those terms or conditions.
Article 17 imposes certain obligations on suppliers, wholesalers or retailers who purchase grocery goods outside the State and import them into the State to furnish the Director of Consumer Affairs a statement of the terms and conditions on which such goods were purchased and imported. Although such obligations do not arise if the goods are the same kind as other goods in respect of such a statement as being furnished to the Director and are purchased and imported on the same terms and conditions.
Article 18 contains the payment by a supplier and the receipt by a retailer or wholesaler of “hello” money. Under Article 18, suppliers are prohibited in paying and retailers and wholesalers are prohibited from receiving payments or allowances or reductions or discounts in prices in consideration of the carrying out by the wholesaler or retailer of advertising in respect of the goods or
12 making available space or additional space on opening a new retail outlet, on extending an existing outlet or after change of ownership of an existing outlet.
Article 19 contains technical provisions governing proof of the net invoice price of goods in proceedings under the Groceries Order.
Finally, Article 20 provides that the provisions of the Groceries Order prohibiting below cost sales of grocery goods and advertising such below cost sales do not apply in respect of “seasonal goods” which is defined in Article 2 as meaning Christmas cakes, Easter eggs and Halloween bracks.
Enforcement of the provisions of the Groceries Order is entrusted to the Director of Consumer Affairs. The contravention of any provision of the Groceries Order is a criminal offence under Section 20 of the Restrictive Practices Act, 1972. The director is empowered to bring summary prosecution for breaches of the Groceries Order12. The penalties for breaches of the Groceries Order are contained in Section 23 of the 1972 Act (as amended)13. The penalty on summary conviction in the District Court is a fine not exceeding IR£500 (together with in the case of the continuing offence a fine not exceeding IR£50 for every day on which the offence is committed) or at the discretion of the Court imprisonment for a term not exceeding six months or to both a fine and imprisonment. Prosecutions on indictment are brought by the Director of Public Prosecutions. On conviction on indictment a person is liable to a fine not exceeding IR£10,000 (together within the case of the continuing offence a fine not exceeding IR£1,000 for every day on which the offence is committed) or to a period of imprisonment of up to two years or to both fine and imprisonment.
The Director has brought summary proceedings arising out of breaches of the
11 Article 16(1)(b). 12 Section 24(1) of the Restrictive Practices Act, 1972 as amended by Section 22 of the Restrictive Practices (Amendment) Act, 1987. 13 Section 23 of the Restrictive Practices Act, 1972 as amended by Section 21 of the Restrictive Practices (Amendment) Act, 1987.
13 Groceries Order. In addition to enforcement by way of criminal proceedings the Director has also commenced civil proceedings seeking interim and interlocutory injunctive relief to restrain breaches of the Groceries Order. This procedure has enabled the Director to obtain urgent relief from the court in relation to breaches or alleged breaches of the Groceries Order. The following table summarises the enforcement actions in relation to the Groceries Order:
Date Complaints / Prosecutions Civil Proceedings Investigations Commenced Commenced 1988 77 - 2 1989 87 - 2 1990 12 2 - 1991 n/a - 2 1992 12 2 1 1993 n/a - - 1994 n/a 1 - 1995 6 - - 1996 4 - - 1997 16 - - 1998 5 - - Source: Director of Consumer Affairs
The Current Legal Status of the Groceries Order It should finally be pointed out that the current legal status of the Groceries Order is somewhat unusual having regard to the provisions of the Competition Act, 1991. These provisions led to the following comments by Ireland’s member on the Court of First Instance of the European Communities, Judge John D. Cooke, who writing extra-judicially described the Groceries Order as an anomaly which is:
“still hovering like a magician’s assistant in the statutory vacuum left by the repeal of [the Restrictive Practice Acts]. It hangs there, unchangeable, suspended on the tenuous thread of a questionable Commencement Order under Section [2] of the 1991 Act,
14 notwithstanding the blunt wording of Section 22”14.
The reason for these doubts concerning the continued existence of the Groceries Order having regard to the 1991 Act arises from a combination of the provisions of Section 2 and Section 22 of the 1991 Act. Under Section 2(1) it was provided that the 1991 Act should come into operation on the day or days as may be fixed by order of the Minister “either generally or with reference to a particular purpose or provision” and “different days may be so fixed for different purposes and different provisions of [the 1991 Act]”. Under Section 22 the provisions of the Restrictive Practices Act, 1972 and “every order made under that Act” together with a number of sections in the Restrictive Practices (amendment) Act, 1987 were repealed.
However, Section 2(2) provided that an Order under Section 2(1) could as respects the repeal effected by Section 22 of the provisions of the 1972 Act “fix different days for the repeal of different provisions of that Act or for the repeal for different purposes for any provision of that Act”. Thus, Section 2(2) did not refer to orders made under the 1972 Act but only provisions of that Act. Since the 1972 Act and all orders made thereunder were repealed by Section 22 of the 1991 Act it was felt in some quarters that notwithstanding that it was the clear intention that the Groceries Order would remain in force15 the Groceries Order may have been inadvertently repealed. However this argument was made in Masterfoods Limited v H.B. Ice Cream Limited16 and was rejected by Keane J in the High Court. He relied on the fact that Section 2(1) empowered the Minister to provide for the coming into operation of the 1991 Act on such day or dates as he might fix either generally “or with reference to a particular purpose or provision”. He found that the Minister had made use of that power in the commencement order17 to bring into force on 1 October 1991 Section 22 for all its purposes other than those specified
14 Judge Cooke was writing in the foreword to Imelda Maher “Competition Law Alignment and Reform” Roundhall Sweet & Maxwell (1999) at vii-viii. 15 See for example the comments by the Minister in Dail Eireann - 409 Dail Debates Col. 776. 16 [1993] ILRM 145. 17 Competition Act, 1991 (Commencement) Order, 1991.
15 and among those specified was the repeal of the 1987 Order. The court held the Minister was clearly entitled to do this. Therefore, it would appear that notwithstanding the doubts about the continued existence of the Groceries Order its existence has received judicial confirmation in the form of the judgement of Keane J in the High Court18. The Group has proceeded on the assumption that the Groceries Order is in force.
18 The issue of the status of the Groceries Order was not among the issues which are the subject to the appeal to the Supreme Court.
16 3. 1991 Fair Trade Commission Report
The most recent review of the Groceries Order was carried out by the Fair Trade Commission in 1991. The Commission furnished its report to the then Minister for Industry and Commerce in August 1991. A majority of the Commission19 recommended that the Groceries Order should be abolished in its entirety. The minority20 agreed that certain of the provisions of the Groceries Order would no longer be required when the Competition Act, 1991 came into operation but argued that certain of the provisions in the Groceries Order should be re-enacted in the form of a Fair Trade (Groceries) Act including the prohibition on below cost selling and the provisions governing suppliers’ terms and conditions.
The Commission was unanimous in its view that having regard to the enactment of the Competition Act, 1991 and in particular Section 4 of that Act, the provisions of the Groceries Order containing agreements to fix or maintain prices in Articles 3, 4, 5 and 6 of the Groceries Order were no longer necessary and should be repealed. The Commission was satisfied that agreements and practices were covered by Section 4(1) of the Competition Act, 1991 and there was no necessity to prohibit such practices by way of a separate order in the groceries sector.
The Commission was also unanimous in its recommendation having regard to the enactment of Section 4(1) of the Competition Act, 1991 the provisions of Articles 7 to 10 (inclusive) of the Groceries Order should be repealed.
The Commission was divided in relation to the provisions of the Groceries Order governing below cost selling, namely, Articles 11, 12, 19, 20 and (part of) 2 but the majority recommended repeal of those provisions. It concluded that the anti-competitive aspects of below cost selling would adequately be
19 Patrick M. Lyons (Chairman) and Patrick Massey (now member of the Competition Authority and Director of Competition Enforcement). 20 Mr. Myles O’Reilly, Secretary of IBEC Competition Council and a member of the present
17 covered by the Competition Act, 1991. It was accepted that in the absence of an agreement or action which might be caught by Section 4 of the 1991 Act below cost selling by a firm which was not in a dominant position and which did not have a predatory object or effect would not be prohibited by the Competition Act. The majority however was of the view that non predatory price competition was no less desirable than other forms of promotion such as advertising, opening hours and free deliveries and a ban on below cost selling which was non predatory and which was not engaged in by a firm in a dominant position in the market was a “serious restriction upon competition and upon the free play of market forces”21. The majority also considered that there was “persuasive evidence” that the prohibition on below cost selling had resulted in higher prices, a decrease in price competition and an increase in margins22.
The minority (Mr. O’Reilly) argued that the prohibition on below cost selling should be retained and extended and re-enacted in the form of a Fair Trade (Groceries) Act. He recommended that the definition of cost should be changed from the “net invoice price” to the price after taking into account all discounts or rebates related to the goods. He was of the view that the ban on below cost selling should be retained for a number of reasons, principally that the removal of the ban would lead to an increase in concentration and would strengthen the position of multiples at the expense of independents and small firms. He was of the view that an increase in concentration be likely to reduce competition or damage the interests of consumers and independent retailers. The majority did not agree with Mr. O’Reilly’s proposals that the ban on below cost selling should be retained as part of a new Fair Trade (Groceries) Act.
The Commission was also divided in its findings and recommendations concerning provisions of the Groceries Order governing terms and conditions of supply at Articles 13 to 18. The majority recommended that Articles 13 to
Review Group. 21 FTC 1991 Report para 7.124.
18 18 of the Order be repealed. It was of the view that the provisions of Section 4 and 5 of the Competition Act, 1991 were sufficient to address the issues with which these Articles are concerned. With regard to the provisions in Article 16 governing adherence to credit terms, the majority was of the view that whilst non-compliance with credit terms might constitute a breach of Section 4 or Section 5 of the Competition Act, 1991 if a problem should arise which could not be determined by reference to the 1991 Act consideration could be given to the introduction of special legislation on credit terms in the future. The majority was of a similar view in relation to Article 18 which prohibits “hello” money. The majority felt that the Competition Act, 1991 would apply and to the extent that it did not and if problems arose consideration could be given to specific legislation in respect of such payments. On that basis the majority was of the view that Articles 13 to 18 of the Groceries Order should be repealed.
The minority, Mr. O’Reilly, agreed that certain of the Articles could be repealed having regard to the Competition Act, 1991. They were Articles 13(2), 13(3), 13(4), 14(1), 14(2), 14(3) and 14(4), 15, 16(1)(c), 16(2) and 17. However, he was of the view that the matters covered by the remaining Articles should be re-enacted in the form of a Fair Trade (Groceries) Act. The matters which he felt should be re-enacted in that form concerned (1) the requirement to prepare and make available statements of terms and conditions; (2) the provisions regarding a refusal to supply and adherence to credit terms, and (3) the provisions governing threats and inducements, advertising allowances and “hello” money. The majority did not agree that Fair Trade (Groceries) Act legislation was necessary.
22 FTC 1991 Report para 7.128.
19 4. Summary Of Submissions On The Groceries Order
The purpose of this section is to summarise briefly the submissions received by the Group on the Groceries Order. The persons and organisations who made submissions to the Group on the Groceries Order have been identified earlier in this paper. Most of the submissions from industries made to the Group favoured retaining the Groceries Order in its current state or by way of new legislation. Economists and the Competition Authority favoured the repeal of the Order.
(1) IBEC: Competition Council and Food, Drink and Tobacco Federation
Detailed and helpful submissions were received by the Group from both the Competition Council and the Food Drink and Tobacco Federation of IBEC.
In its submissions the Competition Council (the “Council”) stated that it was “essential that the provisions of the ban on below cost selling and the requirements in relation to the payment of supplier’s accounts be retained”. The Council also considered that the other “fair trade provisions” in the Groceries Order be retained. The Council submitted that the Group should recommend to the Minister that a Fair Trade Groceries Act should be introduced. In its submissions, the Council identified what it considered a number of beneficial effects of the Groceries Order. They may be summarised as follows:
(a) A rate of increases in food prices in the five years following the introduction on the ban of below cost selling was lower than in any five year period since 1947; (b) The rate of increase in the food price index has since 1987 been lower than the increases in the Consumer Price Index; (c) The rate of increase in the food price index has since 1985 been significantly lower than in the United Kingdom or the rest of the European Union;
20 (d) The retailer’s margin on food sales has not increased; (e) Since the introduction of the Groceries Order the production of the food and drink industries has increased over fifty per cent and the stability brought about by the Groceries Order has made a “significant contribution” to this; (f) Since 1990 employment in the food and drink processing industries has increased by three thousand people when compared with a fall in employment between 1981 and 1990. The Competition Council believe that this was partly due to the fair trading environment brought about by the Groceries Order.
The Council identified what it submitted to be the effect of removing the Groceries Order. Those effects may be summarised as follows:
(a) Total employment in the retail sector and associated sectors could be reduced by up to 23,000 people; (b) Consumer prices would in time increase by more than the “all items” index because greater market concentration would lessen competition; (c) Irish producers would experience a loss of competitiveness leading to a reduction in exports of food products which would be brought about by unfair trading conditions on the home market; (d) Other retail sectors would experience harmful effects as multiples would attract customers from outlets such as hardware, gardening and similar outlets by below cost selling of food; (e) It would facilitate the entry of British multiples which would have further harmful effects for employment in the food processing sectors and in the development of food exports which would seriously disadvantage Irish suppliers and producers. The Council accepted that the “competition” provisions in the
21 Groceries Order have been “largely duplicated” by the Competition Act, 1991 but it submitted that it was still important that a number of features of the Groceries Order be retained. Whilst the Council submitted that the two most important provisions which should be retained are the ban on below cost selling and the requirement that suppliers be paid in accordance with their terms, other provisions should also be retained to ensure fairness in the grocery trade.
The Council offered as the preferred solution the retention of the fair trade provisions in the Groceries Order indefinitely in the form of specific legislation providing for fair trade in the grocery trade which it recommended should be enacted. In the alternative, the Council submitted that the Competition Acts should be amended to provide specifically for fair trade in the grocery market. Those provisions which the Council felt should be retained and re-enacted in this manner are Articles 11, 12, 19, 20 and (part of) 2 relating to the ban on below cost selling and Articles 13 to 18 relating to (inter alia) supplier’s terms and conditions and the ban on “hello” money. The Council submitted that the matters dealt with in these Articles are not regulated by the Competition Acts and the retention of such provisions in the form of the fair trade legislation which the Council submitted should be enacted would not have an anti-competitive effect. The Council attached by way of an annex to its submissions proposals for a Fair Trade (Groceries) Act.23
The submissions made by the Food, Drink and Tobacco Federation of IBEC (the “Federation”) were to the same effect. The Federation submitted that the Groceries Order was “fundamental in ensuring fair competition in the Irish grocery market”. It also submitted that the removal of the Order would have serious consequences and echoed the effects submitted by the Competition Council. The Federation submitted that if the Groceries Order is not retained “a substantial
23 The IBEC Competition Council submissions are to a significant extent reflected in Chapter 6.
22 number of jobs would be lost both in the retail sector and in the supplying sector” and that it is “important that the government ensure that fair competition exists in the market place”.
(2) RGDATA - IADT - SSRF
A joint submission was made to the Group by the Retail Grocery Dairy and Allied Trades Association (RGDATA), the Irish Association of Distributive Trades (IADT) and the Service Station Retailers’ Federation (SSRF). RGDATA represents more than 9,000 independent grocery and newsagent retailers in the State. IADT represents 44 food wholesalers who operate more than one hundred cash & carries throughout the State many of which also deliver to retail customers. The SSRF represents 1300 service station / forecourt shop retailers in the State.
In their submission, RGDATA, IADT and SSRF (which shall for ease of reference be referred to together as “RGDATA”) advocated the retention and strengthening of a number of provisions of the Groceries Order. RGDATA submitted that the Order has been of “incalculable importance” to the retail and wholesale sector since 1987. RGDATA submitted that the ultimate beneficiary of the Groceries Order has been the consumer whom it submitted has benefited from low prices in a competitive market which has benefited from the ban on below cost selling. RGDATA submitted that because of the importance of the grocery sector to consumers daily lives and to the lives of those working in and supported by the groceries sector there are “clear arguments in favour of an element of public regulation of the sector”. RGDATA submitted that a minimum legislative framework to discourage unfair and predatory trade practices is necessary to enable the new competition from UK multiples to be met head on. It submitted that if the “restraining influence” of the Groceries Order was removed without being replaced the market would descend into “semi
23 chaos”. This would lead to a new drive for market share based on loss leading the eventual winner of which would be the company with the greatest resources. It was submitted that this would lead to job losses across all sectors and would be detrimental to the consumer. Standards and investment would also decline.
RGDATA accepted that certain elements of the Groceries Order have been duplicated by the Competition Acts 1991 to 1996. However, until the enforcement provisions in the 1996 Act were introduced it was necessary to retain those provisions of the Groceries Order. RGDATA accepts that Articles 3 to 10 have now been superseded by the Competition Acts, 1991 to 1996 and accept that it is not necessary to retain these Articles of the Groceries Order. However, RGDATA submitted that the Order should not be repealed in its entirety and that the provisions dealing with the ban on below cost selling, the prohibition on “hello” money and on the abusive credit terms and the requirement to retain a statement of terms and conditions should be retained. Failure to do so would, RGDATA submitted, result in a closure of over two thousand independent retailers throughout the State and a consequent loss in employment and services to the public. RGDATA submitted that new legislation should be en-acted providing for the retention of key aspects of the Groceries Order. Those aspects of the Groceries Order which RGDATA submitted should be retained and re-enacted in the form of new legislation are:
(a) The ban on below cost selling. (b) The ban on “hello” money. (c) The provisions governing adherence to supplier’s credit terms. (d) The “Fair Trade” provisions in the Order, namely, Articles 13 to 18.
(3) Irish Farmers Association
The Irish Farmers Association (IFA) made a submission to the Group
24 advocating retention of the Groceries Order and the extension of the provisions of the Order to include fresh fruit and vegetables.
The IFA submitted that the retention of the Groceries Order was vital to allow Irish farmers producing milk, meat, fruit, vegetables and potatoes to compete fairly and on an “even plane” with imports. The IFA submitted that in relation to the milk market the Groceries Order has been instrumental in maintaining a high level of door stop sales by ensuring that they would not be undermined by predatory pricing by supermarkets and that this had not been achieved at the expense of the consumer as the retail price of milk has not increased beyond inflation in the past 10 years. The IFA submitted that the abolition of the Groceries Order would encourage a return to price wars between supermarkets in which Irish primary producers, small food processors, consumers and independent retailers would be the “ultimate casualties”. It submitted that the only winners in such price wars would be the major supermarket chains.
(4) Irish Co-operative Organisation Society Limited (ICOS)
The ICOS furnished a submission to the Group advocating retention of the Groceries Order. It submitted that it was vital that the ban on below cost sales should be retained “so that trade can take place in an environment that is fair to all”.
(5) A Distributor of Fresh Fruit and Vegetables
A detailed submission was made by a firm of solicitors acting for a distributor of fresh fruit and vegetables. The submission was made on the basis that it would be treated as confidential. The identities of the firm and its clients are not disclosed. It was submitted by the distributor that fresh fruit and vegetables which are excluded from the Groceries Order are repeatedly targeted by multiples for heavily advertised below cost selling. It submitted that
25 such heavily advertised below cost selling causes significant inefficiencies and unnecessary expenses. It favoured retail outlets selling fruit and vegetable products for low cost or on a marginal basis provided this was done (i) for an extended period of time and (ii) for a total or at least a wide range of products which would have stimulated demand without unnecessary costs. However, it submitted that this was rarely the case as such short term below cost selling produces a short term surge and demand requires additional distribution on a non- scheduled and urgent basis which is disruptive and increases costs. It submits that such heavily advertised below cost selling of single product ranges increase inefficiencies in the production and distribution system of suppliers to the retail outlets and would impose unnecessary costs which are of no benefit to the consumer. In summary, the firm submitted that the ban on below cost selling should be retained but should also extend to fruit and vegetable produce. If the ban is not extended to fruit and vegetable the firm submitted that the ban on below cost selling should be removed so that the fruit and vegetable sector would not continue to be the target of all below cost campaigns.
(6) An Bord Glas (The Horticultural Development Board)
An Bord Glas furnished a submission to the Group which advocated the inclusion of horticultural produce within the scope of the Groceries Order so that such produce would not in future be a focus for below cost selling. An Bord Glas referred to a previous submission which it made in similar terms to the Department of Enterprise & Employment in 1994.
(7) Barry Doherty
Barry Doherty, a member of the Legal Service of the European
26 Commission furnished a submission to the Group in his personal capacity. He pointed out differences between the rules in the Groceries Order and those applied by the Competition Authority under the Competition Acts. He noted that the effectiveness of the Groceries Order might be open to question and referred in particular to the ban on the payment of “hello” money. His submission also noted the practical importance of the Groceries Order had been “greatly reduced” because of the general remedies now available under the Competition Acts. However, his submission states that the Groceries Order is still useful in that it covers areas which are not necessarily covered by “pure” Competition Law. He suggests that it would be possible to incorporate special rules for the grocery sector in a “revised” Competition Act.
(8) Dr. John Fingleton (T.C.D.)
Dr. John Fingleton of the Department of Economics in Trinity College made a submission to the Group part of which concerned the Groceries Order which he described as a “serious anomaly in our system of competition”.
Dr. Fingleton’s views on the effectiveness of the Groceries Order can be seen from the following extract from his submission:
“The Groceries Order is a serious anomaly in our system of competition and, very probably, assists anti-competitive behaviour in some of the most concentrated markets in the economy, namely, the distribution and retailing of groceries.
The Order prevents retailers selling below cost, where cost is defined as the price on the invoice. However, this is not the true cost, as off invoice discounts are substantial and wide spread. Thus the Order permits a form of resale price maintenance in the groceries sector.
27 IBEC has produced various statistics that illustrate that food prices did not rise in real terms between 1987 and 1993. However, margins not final prices, are relevant to the effects of the Order as it affects the distribution and retail business rather than the manufacturer. The price of the raw materials (e.g. food) did not match inflation over the same period.
There is nothing to recommend the retention of the Groceries Order other than the interests of producers in this sector. The Order undoubtedly imposes high costs on the consumer and offers a convincing explanation for the under development of the distribution and retailing sectors in the Irish economy.”
(9) Patrick P. Walsh and Ciara Whelan
Patrick P. Walsh of the Department of Economics, Trinity College, Dublin and Ciara Whelan of the London School of Economics24, made a submission to the Group on the Groceries Order. They generously furnished a copy of two papers which they presented to the Irish Economic Association in May 1995 and the European Association for Research in Industrial Economics in September 1996 entitled respectively “A Rationale for Repealing the 1987 Groceries Order” and “Loss Leading and Price Intervention in Multi-Product Retailing: Welfare Outcomes in a Second Best World.”
In their submission, Dr. Walsh and Ms. Whelan argue that loss leading is a form of competitive price discrimination that processes information for the consumer in the short run and has no effect on structure in the long run. They argue that loss leading is an equilibrium outcome that is socially desirable in
24 Both economists are also of the Centre for Transition Economics, Katholieke Universiteit, Leuven.
28 an imperfectly competitive market with imperfect consumer information. They argue that the provisions of the Groceries Order may have had the unintended and perverse effect of implementing minimum resale price maintenance resulting in a large proportion of increased consumer expenditure being appropriated upstream to suppliers who were never intended to benefit from the Groceries Order. They argue that this is likely to increase the likelihood of the market becoming more concentrated in the long run. Analysis suggests that since the introduction of the ban on below cost selling in the Groceries Order concentration of the market has continued to rise. They believe there is a possibility that this may in part be attributed to the introduction of the Groceries Order. They argue that the removal of the ban on below cost selling and the exposure of the grocery retail market to the provisions of the Competition Acts would be beneficial for overall welfare and that the Competition Acts are the preferred legislative framework given the possibility that loss leading can be a legitimate reflection of the competitive process. Their arguments are reflected more fully in Chapter 7 below.
(10) Competition Authority
In its second submission to the Group the Competition Authority addressed that part of the Group’s terms of reference which was directed to considering the “effectiveness of competition legislation and associated regulations”. In this submission the Authority addressed the Groceries Order. The Authority recommended the repeal of the Groceries Order on the basis that it is anomalous and counterproductive.
The Authority noted that prohibition on resale price maintenance, price discrimination and the payment of “hello”
29 money would be prohibited under the Competition Acts where they inhibit competition and submitted that to that extent the Groceries Order is redundant. The Authority submitted that the ban on below cost selling and the ban on refusal to supply in the Groceries Order operate at cross purposes with the Competition Acts.
With respect to the ban on below cost selling, the Authority noted that the Competition Act, 1991 prohibits predatory pricing in the sense of deliberate below cost selling by dominant firms in order to eliminate competitors. However, the Authority noted that many cases of below cost selling are not predatory but may be a “legitimate means of increasing market share which is the objective of all competitive behaviour”. In its submission the Authority argued that the ban on below cost selling is a “highly effective mechanism for suppliers to enforce minimum prices” and that the Authority had received a complaint which “fully substantiates its use for that purpose by a group of all of the main suppliers of one basic grocery product”.
The Authority addressed some of the arguments for the retention of the Groceries Order put forward by representative bodies of suppliers and independent retailers. Those bodies have argued that the ban on below cost selling has helped to contain food price increase, has preserved employment and enhanced the competitiveness of Irish food processors. However, the Authority argued that such claims are not compatible with “most conventional explanations of causes of inflation”. The Authority also disputes the assertion by supporters of the ban on below cost selling that the ban is necessary to ensure the survival of small independent grocery retailers even if true the Authority contends that this merely
30 illustrates the common perception that the purpose of the ban is to protect competitors and not competition. The Authority noted that the numbers of retailers have continued to decline. In response to the contention by supporters of the ban that the ban protects jobs by protecting small retailers and suppliers, the Authority contended that in reality many suppliers to the grocery trade have closed their domestic manufacturing operation since the Groceries Order came into force and now act as distributors of imported goods.
With respect to the prohibition on refusal to supply in Article 13(1) of the Groceries Order (i.e. the obligation on the supplier to sell to wholesalers or retailers in accordance with the supplier's written terms and conditions), the Authority noted that while in some circumstances a refusal to supply would be anti competitive but there are also legitimate reasons why suppliers may refuse to supply on purely commercial grounds and that this distinction is not reflected in the Groceries Order.
The Authority referred to the research of a number of economists and bodies suggesting that the Groceries Order restricts competition and is harmful to consumers. The Authority argued that the only supporters of the retention of the Groceries Order are bodies representing retail grocery interests and suppliers. The Authority recommended the repeal of the Groceries Order on the basis that it is anomalous and counter productive. (11) William P. Fagan (former Director of Consumer Affairs)
William P. Fagan, former Director of Consumer Affairs furnished the Group with a copy of a paper entitled “Enforcing the Groceries Order Past and Future?” delivered at a conference in February 1997. At the conclusion of his paper Mr. Fagan set out a series of observations which he indicated might help the Group and others considering the
31 future of the Groceries Order. Those observations were as follows:
“1. I have no vested interest one way or another in the continuation of the Order. I have been less active in relation to the Order in recent years because I have received fewer complaints. I have not been proactive in relation to the enforcement of the Order (a) because I see no need for it and (b) because I have a greatly expanded range of functions in other areas which require me to be proactive in those areas. 2. I believe the Order has done no real harm to our economy. I would leave it to food/grocery trade industry representatives to talk about the benefits. I would point to four items only: (a) Low food inflation; (b) Absence of collapses since H. Williams in the 1980’s (whether this is good or bad depends on your point of view); (c) Improvement in the standard of retail outlets; (d) Growth of high standard single outlets particularly in rural Ireland. 3. I believe Irish and UK price levels are getting closer to one another… 4. The Groceries Order should not be a relevant issue in relation to the expected UK food retail invasion. We have had difficulty in determining the precise inward cost for the purposes of Article 11 of the Order. UK retailers are, however, free to enter the Irish market and may use internal invoicing methods to bring goods from stores in the UK without reference to the Groceries Order. We had a District Court ruling that such internal invoicing was not relevant in the case of Power Import/Quinnsworth Group. 5. The decision on a continuation of the essential features of
32 the Order will be a political one based on the views of the Review Group. I believe it will boil down to the issue of below cost selling. 6. The Groceries Order is an old piece of legislation which cannot be amended. I believe that if it is to continue in some form a new piece of legislation (probably a Groceries Act) will be required. The question also arises as to who should enforce it.”
33 5. Independent Study On Impact Of Groceries Order
As pointed out in the introduction to this paper the Group decided to engage the services of DKM Economic Consultants Limited to carry out a study on the economic impact of the Groceries Order and to report on the results of its study to the Group. A copy of the DKM report is attached at Appendix A to this document.
In assessing the impact of the Groceries Order, DKM concentrated exclusively on what it regarded as being the most significant and most controversial provision in the Order, namely, the ban on below cost selling. In its report DKM describes the ban on below cost selling as resembling although not identical to resale price maintenance. The DKM report considers the submissions made by the various parties to the Group and the evidence available on the impact of the Groceries Order. In particular, the report looks at the effect of the Groceries Order on trends in food prices relative to the Consumer Price Index, on margins in the grocery trade and on trends in market structure including the overall number of outlets and concentration. DKM express the view that the ban on below cost selling “is unlikely to have profound effects on any of these three variables”.
With respect to food prices, DKM note that the consideration of data on food prices relative to the Consumer Price Index from 1976 does not support the view that the Groceries Order has had any discernible effect on food prices and that extraneous factors affecting relative prices in the economy are ”more powerful than any conceivable impact from the Groceries Order”. DKM do not believe that the impact of the Groceries Order on relative prices is capable of being assessed by reference to the CPI and its component series. DKM conclude with the view that none of the submissions succeeded in establishing that the Order had the beneficial impact claimed on food prices.
With respect to margins, DKM express the view that the evidence in the
34 submissions does not support the view that the Groceries Order has had the effect of applying downward pressure on margins in the trade. They suggest that the available evidence, restricted to gross margins and therefore of questionable value, does not show a pattern of decline in margins.
Finally, with respect to the question of market structure, DKM express the view that it is not possible to draw firm conclusions from available data on the influence of the Groceries Order on outlet numbers because of extraneous influences such as demographic change, population decline, urbanisation and rise in car ownership. DKM express the view that none of the submissions established that the Order has had the effect of ensuring a greater number of outlets either nationally or in specific locations than would otherwise have been the case in its absence. With respect to the question of concentration, DKM express the view that from the submissions or otherwise they are unaware of evidence establishing that the Groceries Order has impacted on the degree of concentration in the industry.
The DKM report considers the economic effect of repealing the ban on below cost selling contained in the Groceries Order. DKM argue that the static impact of repeal of the Order would be limited and would not result in any major impact on consumer prices or on margins. The principal impact would be on the composition of promotional activities. They also argue that the dynamic impact of repeal of the Order would be even more limited. They conclude their review of the potential consequences of repealing the ban on below cost selling in the Groceries Order as follows:
“Different countries have adopted different approaches to the practice of below cost selling. It is permitted, for example, in the UK, as well as in Germany, Spain and Italy, but restricted in France, Belgium and Portugal.
The objectors to repeal of the Groceries Order have failed in their submissions to demonstrate empirically the claimed benefits of the
35 Order, or to establish the justification for their predictions of the impact of repeal. The available evidence, as well as considerations of market structure and competitor response lead us to conclude that the impact in Ireland is capable of being exaggerated.
The principal immediate impact of the Order is to facilitate a form of minimum price maintenance, and to channel competition into other avenues. The claims made for the Order include beneficial impact on suppliers of the multiples and on their smaller competitors. The protection of these interests is not a feature of Irish consumer or competition law in other sectors, and the Groceries Order is to that extent an anomaly.”
The conclusions and recommendations of the DKM report are contained in Section 6 of the report and are as follows:
“Conclusions, Recommendations
Our conclusions mirror those of the majority report of the Fair Trade Commission in 1991.
They concluded, inter alia, that the ban on below cost selling did not prohibit pricing behaviour by a dominant player which might be predatory in intent or effect.
They concluded that for predatory pricing to be effective, the predator must succeed, not only in eliminating competitors, but also in inhibiting the entry of new ones. They express doubt that these conditions obtain in the Irish grocery market.
They consider that:
“… promotional, non-predatory, price competition, including below cost selling, is not less desirable than other forms of promotion such as advertising, opening hours, free delivery and so on”
36 They expressed scepticism about claims that the Order had resulted in food prices rising by less than the CPI.
They attributed an evident increase in non price competition with the impact of the Groceries Order and concluded that the Order had the effect, particularly in view of the practice of off-invoice discounting, of permitting a form of resale price maintenance.
They did not accept that the majority of consumers were, or would be, fooled by below cost selling, and they expressed doubt as to whether removal of the ban would impact adversely on independent stores.
On the matter of retail chains facing undue pressure on suppliers, they did not consider that any safeguards were required over and above those contained at Section 5 of the Competition Act.
We agree with each of these conclusions and believe that the available evidence from the period since the FTC report was written, including the evidence cited in submissions, does not controvert them.
The majority also concluded (paragraph 7.128) that:
“… there is persuasive evidence that the ban on below cost selling has resulted in higher prices, a decrease in price competition and an increase in margins”.
We have concluded that the available evidence is inadequate to support categorical attributions of movements in prices and margins to the impact of the Groceries Order.
The minority report drew radically different conclusions on many points. The most significant were:
! If there is no prohibition on below cost selling,
37 market concentration is likely to increase substantially; ! Below cost selling will make it almost impossible for many independents to compete; ! A ban on below cost selling can be a significant barrier to predatory conduct.
We have concluded that the likely impact of a removal of the below cost selling ban would be limited. The third point cited above is in conflict with the know facts. A multiple which cuts prices across the board to the level of cost would be operating at hugely negative net margins, could only chose to do so rationally with some form of predatory intent, but would be operating within the terms of the Groceries Order.
The majority of the FTC recommended the repeal of the Groceries Order in its entirety, and this is also our recommendation.”
38 6. Arguments in Favour of Retaining the Groceries Order.
1. Introduction and Summary of Arguments
This chapter summarises out the arguments in favour of retaining the Groceries Order.25 The chapter is largely a response to the DKM report from the point of view of those who support the retention of the Order such as IBEC and is based to a large extent on the IBEC submissions. It argues that the conclusions of the DKM report should not be accepted by the Review Group and that the Groceries Order fair trade provisions be maintained.
The Groceries Order came into force eleven years ago. The grocery trade has undergone very substantial change since that time. A review of the statistics shows that food processing activity has grown substantially and the levels of employment in food processing have also grown since the Order was introduced. Similarly, the independent retail trade has been greatly strengthened and provides a credible alternative to the multiples for grocery shopping. Consumers have not been disadvantaged by higher prices and have gained from an increase in choice of product and better grocery stores.
The DKM report found that the Order has not had any significant impact. The report did not consider that its abolition would, therefore, have any negative impact. Thus there is no compelling reason for the order removing the order.
It seems to be significant that nearly all of those who are familiar with the operation of the Order in the grocery trade are not opposed to its continuation. No sector of the grocery trade is arguing that the Order is anti-competitive or has an anti-competitive effect. Opposition to the Order comes from academic and practising economists who, it is believed, have not had the time or the possibility of engaging with the participants
25 In preparing this chapter, the IBEC Competition Council submission of 31st January 1997, the Food, Drink and Tobacco Federation (FDT) submission and information contained in other submissions to the Review Group have been extensively used. Assistance has also been obtained from members of the IBEC Competition Council involved in the grocery trade and, particularly, from Ms. Ailish Forde, Assistant Director of the FDT and members of the Food Processors and Suppliers Group.
39 in the grocery trade to assess in detail the implications and realities of competition in the sector. It is believed that, if they did have the opportunity of having extensive discussions and of examining the nature of that competition, they would have less difficulty with the Groceries Order.
This chapter examines the position of suppliers, consumers and retailers. It seeks to establish what effect the Groceries Order has had on each of these categories. It then assesses the likely impact of the abolition of the Order for each category.
The Fair Trade Provisions There is no conflict between the fair trade provisions of the Groceries Order and the Competition Acts. The Competition Acts can exist comfortably with the fair trade provisions of the Order. Many countries have fair trade laws in addition to their competition legislation. Many of these fair trade laws prohibit below cost selling and loss leading. Ireland is not unique in having such legislation. Many countries also have provisions against price discrimination by suppliers. Among these countries are Germany and the United States (Robinson-Patman Act, 1936). The purpose of the Order is to create fair trading conditions or “a level playing field” between competitors in the grocery market.
Below Cost Selling The Groceries Order is not designed to stop predatory pricing. Below cost selling is not necessarily a predatory activity. However, one of the effects of the ban on below cost selling is to make it less likely that predatory actions would take place. The Competition Act does not specifically prohibit predatory pricing. Only a company in a dominant position is required to sell at fair prices. As it is possible that a Court would not regard any of the present retailers as being in a dominant position, the Competition Act does not prevent unfair pricing or predatory pricing by grocery retailers. It is necessary, therefore, to have a provision such as the ban on below cost selling if below cost selling activity is to be prevented.
The ban on below cost selling has been in existence for over eleven years. It is an established feature of the grocery trade. Almost none of the grocery trade participants advocate its removal. The DKM report was not able to establish any harmful effect of
40 the Groceries Order. In these circumstances, it would seem that to remove the Order against the advice of those who understand and know competition in the grocery trade would be ill advised.
The harm which the removal of the Order would have on suppliers, consumers and retailers could not readily be undone by a re-imposition of similar provisions at a later date. Businesses would have closed, the extent of concentration would have increased and it would take drastic action to restore the present position in the grocery trade. It would seem a dangerous experiment to abolish the Order with a view to assessing what the effects would be.
Effects of the Order 1. The level of food processing has increased very substantially compared with the ten years prior to the Order. The level of employment in the food processing sector has shown an increase since the Order was introduced compared with a fall prior to the introduction of the Order. It is realised that these changes cannot all be attributed to the Order. There have been many other factors. Nevertheless, suppliers consider that the fair trading environment brought about by the Order has had a significant effect on their ability to increase production and employment in the sector. 2. Consumers have benefited from the investment of independent retailers and multiples in better quality stores, the increased range of products supplied, longer opening hours and services such as delivery by some supermarkets. Consumers have also benefited from the intense competition in the sector. Consumers have not had to travel from one store to another to obtain a reasonably priced shopping basket. 3. Independent retailers are much stronger in 1999 than they were in 1987. The introduction of the ban on below cost selling gave them the confidence to invest in their stores. This has led to a much higher quality of store throughout the country. The share of the market now held by independent retailers, including those who are members of symbol groups, is higher than it was in 1987 prior to the introduction of the order. 4. Employment in the sector has grown. The numbers employed by retailers has
41 increased. The numbers employed in the food processing sector has also grown.
Effects of removing the Order 1. There would be a loss of competitiveness among Irish suppliers in their home market. This loss of competitiveness in the home market will, in time, result in reduced competitiveness in export markets. 2. After the initial sale of goods below cost, independent retailers will become less competitive and some will cease business altogether. Concentration will increase and the consumer will have less choice of store. 3. The harmful effects of below cost selling will impact on sectors such as off- licences, hardware stores, drapery stores and other areas where the larger retailer will be selling products not generally sold in a grocery store. The large retailers would be able to attract customers by below cost selling of grocery goods. This will have an unfair effect on other retail sectors. 4. The permission to retailers to sell grocery goods below cost will undoubtedly facilitate the entry to the market of foreign multiples. These multiples will have no difficulty in investing large sums of money in selling goods below cost in order to obtain a foothold in the market. By doing so, they will eliminate domestic retailers who have an allegiance and loyalty to Irish suppliers. 5. The removal of the Order will result in reduced service in stores and reduced quality of stores. The reduction in the number of stores will require consumers to spend more time travelling to stores. It will result in increased car usage. It will also result in some villages throughout the country not having any viable grocery shops with resulting social effects.
2. Suppliers
The suppliers to the grocery trade include producers, processors, importers and distributors.
In order to determine what the effect of the Groceries Order has been on suppliers, statistics have been examined for the years 1977, 1987 and 1998. The Order came into force in January 1998 so that the 1977 and 1987 statistics were before the coming into force of the Order.
42 Production Levels
Category 1977 1987 1998 Slaughtering and Preserving of Meat 80.0 109.8 167.3 Manufacture of Dairy Products 67.1 96.2 109.3 Grain milling and manufacture of animal and poultry food 85.6 105.2 147.4 Bread, biscuit and flour confectionery 103.7 83.4 97.6 Manufacture of sugar and cocoa, chocolate and sugar confectionery 99.9 98.6 125.9 Other foods 86.3 155.6 364.8 Total 77.1 117.4 204.3 1985=100 Source: CSO
During the ten years from 1977-1987 production increased by 52%. During the eleven years from 1987-1998, production rose by 74%. The changes in the production of “Other foods” is more significant. In the ten years to 1987 these rose by 80% whereas in the eleven years to 1998, they rose by 134%.
Undoubtedly, there are many factors influencing the levels of production. These are changes in the Common Agricultural Policy, currency movements, changes in taxation, reduction of trade barriers, etc. However, one of the important factors for food producers is the ability to trade on a fair basis in their home market. The Groceries Order has provided a fair trading environment. This has enabled suppliers to test market products in the Irish market and then to export them. It is significant that the greatest increase in production has been in the category “other foods”. This has been where the development in food processing has taken place.
43 Employment in the Food and Drink Processing Industries
Numbers of Employees – 000’s
Category 1977 1987 1997 Slaughtering and Preserving of Meat 11.7 9.6 12.1 Manufacture of Dairy Products 9.6 8.0 7.5 Grain milling and manufacture of animal and poultry food 4.7 3.6 2.9 Bread, biscuit and flour confectionery 9.9 6.7 5.7 Manufacture of sugar and cocoa, chocolate and sugar confectionery 7.9 43 4.1 Other foods 6.2 4.9 8.2 Total 50 37.1 40.5 Source: CSO
As can be seen from the above table, employment dropped sharply from 1977-1987. Employment increased by 9% between 1987 and 1997 (the latest available figures). Again, there have been many reasons for the changes in the employment levels. One of the factors has been the adoption of the ban on below cost selling.
A comparison of the volume increases for the food sector with employment in the food and drink processing industries shows that there have been very significant gains in productivity over the past ten years. These productivity gains have been a feature of all manufacturing industries. The trading environment in the grocery trade, however, has contributed to productivity improvements in processing. The absence of discontinuity in production and the absence of delisting of products has contributed to improvements in efficiency and productivity
Views of suppliers In general, suppliers to the grocery trade believe that the ban on below cost selling introduced in the 1987 Order created a fair trading environment which allowed them to expand their businesses and to improve operating and other efficiencies. The ban on below cost selling eliminated the disruptions caused by de-listing and the falls and surges in demand from retailers depending on whether a particular product was being sold below cost or not. This fair trading environment was achieved not only by the ban on below cost selling but by the other fair trade provisions in the Order. These include the provisions in relation to credit, requirements to supply, fair terms and hello money.
44 The overall effect of the fair trade provisions of the Order allowed the management of processors and suppliers to concentrate their time and energies on the development of the businesses, particularly in relation to export markets and improving the efficiency of their operations. These benefits have resulted in increased exports, increased employment as well as a substantial increase in the productivity of those employed.
While the most talked about provision of the Order is the ban on below cost selling, suppliers believe that the retention of the provisions in relation to credit, the requirement to supply, fair terms and hello money are equally important to them. Suppliers believe that these fair trade provisions have general application to all sectors. Many countries incorporate fair trading provisions of this type.
It was the coupling of these fair trade provisions with the ban on below cost selling in the 1987 Order which brought about the following:
• Economic efficiencies through regulatory of supply and absence of discontinuity; • A reduction in the increase in the level of concentration and therefore buying power of the major multiples; • An assurance that a supplier’s brands would not be subject to the whims of retailers.
It must be remembered that Tesco, the largest supermarket group in the United Kingdom with a turnover 18 times larger than any of the Irish multiples, entered the market during the past two years. The Groceries Order ensures that Tesco and other similar market entrants are subject to a set of rules. These rules do not recognise the buying power or the economic power of the entrant but instead concentrate on creating a level playing field and a balance between the interests of suppliers and retailers. Retailers are not disadvantaged by the Groceries Order but have to treat their suppliers in a fair and reasonable way. Ultimately, this is in the interest of retailers as well as of suppliers. Nevertheless, the Order represents a set of fair trading rules with which existing and new market entrants must comply.
The Republic of Ireland market has managed thus far to absorb the entry of Tesco without excessive damage to Irish suppliers. This has been due, in no small part, to the
45 existence of the Order and to the commitments given to the Irish Government by Tesco which were recognised in the EU approval of the Tesco acquisition of Quinnsworth. Hard discounters such as Aldi and Lidl have already established a presence in the Irish market and that trend looks likely to continue in the years to come. Many of these will have economic power, buying power and technical expertise greatly in excess of existing Irish retailers and suppliers. The Groceries Order represents a set of fair trade rules with which they have to conform. If there are no such rules in Ireland, they will employ whatever tactics they need to achieve market power, irrespective of the damage to existing retailers and suppliers.
Importance of Irish Brands Irish food manufacturers provide both branded and own label products. Branded products are owned by the manufacturers and own label products are owned by the retailers. Supermarket groups are a major channel for manufacturers and suppliers to sell their branded products to consumers. However, supermarket groups are in competition with suppliers in so far as promoting their own label product ranges are concerned. Therefore, there is an unequal relationship between suppliers and retailers in that retailers are both customers and competitors (through their own label brands) of suppliers.
A retailer is certainly in a position where he can use below cost selling to destroy a brand’s worth so that the private label can ultimately triumph.
One of the significant developments in the past ten years has been the development of new Irish branded grocery products. For example, the Irish dairy sector has successfully launched a number of value added consumer brands, as has the prepared consumer food sector which has witnessed significant growth. The grocery trade has been supportive of these brands and companies invested in new product development with confidence knowing that their brands will not be used as loss leaders. In the absence of the ban on below cost selling, no such confidence would exist and suppliers would find themselves in a position where the value of their brands would be undermined by below cost selling.
For a company to penetrate overseas markets, it is important to be able to trade
46 satisfactorily in its domestic market.
The removal of the ban would seriously undermine the economics of producing domestically branded goods and would further damage the overall strategy of test marketing and domestic market launch which normally precedes an export market drive.
The Effects on Suppliers of the Abolition of the ban on below cost selling The Groceries Order came into force in January 1988. For the previous eight years there had been a ban on below cost advertising which had the effect of reducing below cost selling activity without eliminating it. Due to a court decision, the enforceability of the ban on below cost advertising was called into question after a number of years and the ban became then of little value.
However, prior to 1980, although there was no ban on below cost selling, suppliers were permitted to withhold supplies of goods if the goods were being sold below invoice cost.
Until the ban on below cost selling was introduced in 1988, suppliers generally discontinued supplies if the goods were being sold below cost. This was due to pressure from other retailers as well as their own need to ensure that their brands were not being devalued.
If the ban were now to be removed, the question arises as to whether suppliers would again seek to not supply where goods were being sold below cost. Because they would not have any explicit right to do so, as provided under the Groceries Order, many suppliers might decide that they would continue to supply irrespective of the price levels at which the goods are being sold. However, many other suppliers might believe that the carefully created image of quality and value attaching to their brands was being undermined by sales below cost and that they should cease supplies so as to bring about an end to the below cost selling activity. In addition, retailers who are not selling below cost, will apply pressure through de-listings and other activities on those suppliers whose goods are being sold below cost by other retailers.
The Competition Act 1991, unlike the Groceries Order, does not require a supplier to
47 supply goods to any particular customer. It could be argued that Section 5 of the Act would require a company in a dominant position to supply goods even if they were being sold by the retailer below cost. Undoubtedly, below cost selling activity will create severe disruption to supplies for consumers, retailers and for suppliers. This disruption will reduce economic efficiencies in the supply chain and will increase costs. These costs, in time, will be passed on to consumers. In addition to increased costs of production, there will be the waste of management time and energy in constantly dealing with these issues at the expense of the long-term development of new products and export markets.
The weakening of Irish suppliers will facilitate the entry of overseas suppliers to the Irish market. Thus a greater proportion of the food and groceries on sale in the Irish market will come from overseas markets. This will have consequential effects on processing activity and employment levels.
The grocery trade is presently being affected by the changeover to central distribution. This has an impact on processors, suppliers and importers. It can be argued whether this will lead to an improvement in efficiency or not. The logistical arrangements presently being put in place will be disrupted by the discontinuities of below cost selling if the ban is removed.
Effect on suppliers of the abolition of the remaining provisions of the Order
Suppliers wish to have all of the fair trade provisions retained. The Order requirements in relation to credit and hello money are particularly important. The rules on non-discrimination in terms are of very considerable importance. If these are removed, the effect on concentration in the grocery trade and on suppliers will be significant. The suppliers note that DKM only addressed the ban on below cost selling. 3. Consumers
Overall Food % Food: Increases in Index Overall Food Prices 1977 131.6 130.0 101.20%
48 1987 357.7 316.0 88.30% 143% 1998 470.1 412.5 87.70% 30.5% Source: CSO
During the ten years from 1977-1987 food prices rose by 143%. However, they rose during that period by less than the overall consumer price index. At the end of 1987 the food price index was 88.3% of the overall index. During the eleven years to 1998, food prices only rose by 30.5%. During that time they rose by slightly less than the overall consumer price index.
Consumer Price Indices Comparisions* Year Ireland UK E.U. 1985 100.0 100.0 100.0 1990 116.8 125.7 123.5 1991 117.6 132.1 130.6 1992 119.0 135.0 134.7 1993 118.8 137.3 136.1 1994 122.9 142 140.2 *1985 = 100 Source: Eurostat
Consumer Price Indices Comparisions* Year Ireland UK E.U. 1994 95.0 93.4 95.3
49 1995 98.1 97.0 98.1 1996 100.0 100.0 100.0 1997 101.5 99.9 100.8 1998 105.7 100.9 102.3 1994/98 11.26 8.03 7.34 *1996 = 100
Overall Price Changes 1985/98 36.74% 53.78% 50.54% Source: Eurostat, Note: Eurostat introduced a new index in 1996.
Since 1985 Irish prices rose by 36.74%. This compares with the increases in UK prices of 54% and of EU average prices of 50.4%.
Since 1994, Irish prices have risen faster than those in the UK or the EU average. However, this compares with a much lower rate of increase from 1985 to 1994. Prices in the past few years have been affected by imported inflation as a result of the depreciation of Sterling.
These tables do not show that consumers have been disadvantaged by higher food prices as a result of the ban on below cost selling. There are many factors influencing food prices including the CAP, currency movements, competition levels and others. It is not possible to say precisely what the effect of the Groceries Order ban on below cost selling has been. It is certainly not claimed that the Groceries Order has contributed to lower food prices. However, it is claimed that there is no evidence that the Groceries Order has contributed to higher grocery prices. This result is to be expected because below cost selling does not, in practice, generally mean lower prices. Below cost selling generally means lower prices on some products while other products are increased to recover the money given away on the “known-value items”.
The most important test to be applied in considering the Groceries Order is whether the price levels are higher as a result of the Groceries Order or not. We see below that the consumer is obtaining many other benefits from competition in the grocery trade. However, if it could be shown that the consumer was having to pay more as a result of
50 the ban on below cost selling, then those who advocate the retention of the Order would have an important case to answer.
The tables show that the rate of increase in the price of grocery products has been modest. Undoubtedly, the price of grocery products is affected by many different influences such as currency changes, CAP reform, changes in lifestyle etc. Nevertheless, the relatively low level of increases in food prices since the Order was introduced in 1988 seems to show that the Groceries Order has not contributed to any increase in the prices of grocery goods.
Below cost selling does not contribute to a reduction in the price of grocery goods. Instead below cost selling means a reduction in the price of some goods and increases in the price of other goods. The overall margin to the retailer is unchanged. Therefore, banning below cost selling could not and did not result in any increase in the price of grocery goods to consumers.
The Irish grocery trade has traditionally been extensively supplied with products manufactured in the UK. The increase in the value of Sterling has resulted in continuing pressure on the price of grocery goods in the Irish market in recent years. Price surveys of grocery products show significant differences between prices of many products in Ireland and the UK. Overall, Irish prices, over a basket of goods, tend to be lower than those in the UK. This pertains although below cost selling is permitted in the UK market.
It would be extraordinarily foolish to think that because below cost selling is prohibited in the Irish market that there is no price competition. Price competition is intense. The only area where price competition is not permitted is in relation to the selling below invoice price of grocery goods.
Consumers benefit from competition among retailers as they benefit from price competition. However, consumers in general do not benefit from loss leading or below cost selling which is intended to mislead the customer about the value they can achieve in a particular store.
51 One of the important areas for consumers is the availability and accessibility of grocery stores. If concentration levels within the grocery trade increase, consumers would have less access to grocery stores. This would result in additional car journeys, traffic disruption etc. Consumers will spend more time travelling from one shop to another. In time, as the effects of below cost selling increase the level of concentration within the trade, consumers will have less choice. Prices will inevitably rise. The drive for efficiency at supplier and retailer level will diminish.
The effect of below cost selling will also be to reduce consumer choice in areas not directly affected by the Groceries Order, for example, hardware, off-licences and other specialised stores.
Both the present Director of Consumer Affairs and her predecessor have publicly stated that the ban on below cost selling should be retained.
52 4. Retailers Retailer Share of the trade
4 Weeks 12 Weeks 48 Weeks October September December 1986 1990 June - 05 % % % Dunnes 24.0 20.4 18.8 Quinnsworth/Tesco 25.0 20.9 21.0 H. Williams 6.0 Superquinn 6.0 4.2 8.7 L&N/Roches 4.0 4.2 2.3 Other Multiples 1.1 Total Multiples 65.0 49.6 51.9 Superquinn/Centra 14.2 17.9 Spar 4.6 Mace 2.8 Other Symbols 4.2 6.9 Total Symbols 18.0 25.7 24.8 Others 17.0 24.7 23.3 100.0 100.0 100.0 Source: Attwood/Taylor Nelson
N.B.: The product mix in the surveys has changed significantly between 1986 and 1999.
The above table must be treated with considerable caution. The first two set of statistics were contained in the Fair Trade Commission reports of 1987 and 1991. However, the first column related only to 31 products surveyed by Attwood at that time. The second column was in respect of a greater number of products and the third column, a still greater number.
The Commission report of 1987 examined the multiple share in great detail. The conclusion was that the multiple shares were not 65% of the market but in the range of 40-50% if the wider market definition including all sales of food in shops, household
53 products and alcoholic liquor is used. The Commission noted that the share had increased significantly since 1980.
The number of multiple grocery outlets in 1986 was 174. This had risen from 107 multiple outlets in 1970. The number declined from 174 to 154 in 1991.
Given that L&N have been taken over by Musgrave and their stores are now trading as symbol stores, and that Roches Stores are also being supplied by Musgrave, the number of multiple outlets has fallen. This is partly due to the demise of H. Williams.
Without the access to the turnover of each of the companies involved, it is not possible to be certain of the impact of the Groceries Order on the share of the market taken by multiples. Nevertheless, it appears that, since the ban on below cost selling was adopted in 1988, there has been no significant increases in the share of the market enjoyed by multiple companies. In particular, it appears that Dunnes and Quinnsworth/Tesco, whose shares were particularly of concern to the Fair Trade Commission in 1986, have not shown any significant increases in market shares since then. It does not seem unreasonable to attribute the interruption to the rapid growth in multiple market shares, that had taken place in the years prior to 1988, to the adoption of the ban on below cost selling at the beginning of 1988. Undoubtedly, there are other factors such as the growth in competitiveness of Musgrave through its SuperValu and Centra stores and the general resurgence of the independent sector. The independent sector would attribute this partly due to the introduction of the ban on below cost selling which led to confidence that it could sustain profitable businesses in competition with the multiple stores.
One prominent supplier with well-known brands has found that the share of its business to the multiples has declined from 56% in 1987 to 45% in 1999. While it could not be stated that this was due to the ban on below cost selling, the supplier believes that the ban on below cost selling has partly contributed to this effect.
54 Concentration in the Irish grocery trade
The statistics above show the following market shares in 1998.
% Dunnes 18.8 Tesco 21.0 Musgrave/Roches 20.2 Superquinn 8.7
The HHI concentration level is 1279. The four firm concentration level is 68.7%.
In Britain, where concern has been expressed about concentration levels, the equivalent figures for December 1998 were:
% Tesco 17.0 Sainsbury 13.0 Asda 9.2 Safeway 8.1
The HHI concentration level is 609. The four firm concentration level is 47.3%.
It is apparent that the Republic of Ireland market is much more concentrated than the British market. This is further illustrated below:
ROI GB Diff. % % % Largest firm 21.0 17.0 (4.0) Largest two firms 41.2 30.0 (11.2) Largest three firms 60.0 39.2 (21.8)
Any measures which might have the effect of increasing the market shares of the largest companies will increase the level of concentration. The Groceries Order was signed in 1987 although it did not come into force until
55 January 1988. Since the Order was signed, there have been a number of significant developments. H. Williams went into liquidation and its stores were sold to other market participants. The H. Williams liquidation happened before the ban on below cost selling came into force and arguably might not have happened if the ban had been introduced.
There have been a number of new entrants to the market; Iceland with some stores, CostCutters, and Vivo, a symbol group of Hendersons of Belfast. Tesco took over the Quinnsworth and Crazy Prices stores. Two German companies, Aldi and Lindl are entering the market. Musgrave have absorbed Roches Stores and L&N. It is significant that Musgrave and BWG have expanded to Northern Ireland, the UK and Spain. In addition, the last ten years have seen the continual growth of the forecourt retailers.
The grocery trade is arguably one of the most competitive in Ireland. Irish grocery shops are of an internationally high standard. Irish towns and villages throughout the country are being served by grocery shops. Undoubtedly, over the past ten years, the numbers of independent grocers who are not aligned with any of the symbol groups has continued to decline. Nevertheless, the existence of a number of symbol groups whose stores are owned by independent retailers provides competition to large multiple entities as well as between symbol groups.
Effects on Competition within the Retail Trade if the Order is Removed
The ending of the ban on below cost selling and the revoking of the other fair trade provisions will result in the following. • More concentration among retailers • Less competition • Reduction in the numbers of specialised stores
Trends in Retail Outlet Numbers
56 Trends in Retail Outlet Numbers 1977 - 1998 1977 1983 1988 1991 1993 1996 1998 Grocers 9,042 7,736 6,575 5,909 5,813 5,296 4,808 Grocers with Off-Licence 377 541 598 563 590 626 792 Grocers with Pub 1,933 936 677 615 424 309 250 Garages with Shop N/A N/A 673 1,188 979 1,282 1,429 Total 11,352 9,213 8,523 8,275 7,806 7,513 7,279
Source: Nielson
The trends in retail outlet numbers cannot be correctly established because Nielson did not have available the numbers of garages with shops in 1977 and 1983. However, on the basis of the above figures, there was a decline of 25% in the numbers of retail outlet numbers selling grocery products between 1977-1988. The decline from 1988- 1998 was 15%.
The rate of decline in grocery retail outlet numbers has been reduced. This may be partly attributable to the increase in population since 1988 and the general growth in gross national product. It may also be that the Groceries Order has given confidence to small grocers to continue in business.
It is interesting that the Fair Trade Commission report of 1991 identified only 159 outlets with more than 8,000 square feet.
5. Compatibility of Groceries Order with Competition Acts
Prevention, Restriction or Distortion
The key provision in the Competition Act, 1991 is in section 4. Section 4 prohibits: “all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State.” It is worthwhile to consider whether the fair trade provisions are in anyway incompatible with the requirements of Section 4. The Groceries Order is a statutory instrument that could be incorporated in separate legislation or in the Competition
57 Acts. Section 4 refers to agreements between undertakings and decisions by undertakings as well as concerted practices. However, the real issue is whether the Groceries Order prevents, restricts or distorts competition.
No one has argued that the fair trade provisions in relation to credit, hello money, requirement to supply etc are not pro-competitive rather than anti-competitive. The only issue on which any controversy lies is in relation to the ban on below cost selling. However, the ban on below cost selling does not prevent, restrict or distort competition. The ban provides a framework within which competition takes place.
The primary purpose of the Groceries Order is to provide for competition in the grocery trade. The ban focuses competition but does not restrict it. The articles prohibit anti-competition actions in the grocery trade. The Order specifically prohibits price fixing by competitors and prohibits resale price maintenance (whereby manufacturers seek to fix the price at which retailers sell their products). Thus it is incorrect to say the Order restricts competition.
There are many other regulations relating to employment, safety, health etc. which also have the effect of providing a legislative framework within which competition takes place. Retailers are not prevented from competing on price down to their invoice price values. Retailers can import products from other countries and are not prevented by the Order from selling these at the cost of import.
The Competition Acts (as does the existing Order) prohibit resale price maintenance and anti-competitive agreements between competitors. If an unintended effect of the operation of the net invoice price mechanism is to bring about resale price maintenance in some instances, then this can be attacked under the Competition Acts.
There is no reason whatsoever why the fair trade provisions of the Groceries Order could not exist alongside the Competition Acts.
Preservation of Competition The fair trade provisions have a long-term pro-competitive effect. In order to ensure that the intense competition presently in the grocery trade continues into the future, it is necessary to ensure that there continues to be a sufficient number of competitors
58 and that no companies achieve a position of dominance so that competition is threatened. The fair trade provisions, by ensuring that there is a level playing field for all competitors in the market, make it more likely that there will continue to be competition in the future. If there is no requirement for fairness, then, undoubtedly, the buying power of the major multiples will be used to the greatest possible effect to obtain terms that discriminate in favour of their operations. This, when accompanied by below cost selling, will greatly increase the concentration levels in the market. The Irish market is already concentrated. Any further increase in market share of the principal companies may bring about an oligopoly. In these circumstances, competition is reduced, prices increase and customer service diminishes. It is reasonable, therefore, to see the fair trade provisions of the Groceries Order as having a long-term pro-competitive effect. By preserving the existing level of competition, they ensure that consumers continue to have the benefits of a competitive market. If the provisions are removed, then, the long-term effect may well be to have an uncompetitive grocery market.
Predatory Pricing The Groceries Order does not prevent predatory pricing. It does, however, make it less likely that predatory pricing will occur.
The Competition Acts do not prevent predatory pricing either. However, section 5 of the Competition Act prevents unfair pricing or other unfair trading conditions. For companies in a dominant position to apply unfair selling prices or other unfair trading conditions would leave them open to an action under section 5 of the Competition Act. However, the definition of unfair may or may not relate to predatory pricing. Predatory pricing means selling at prices that are designed to eliminate a competitor from the market. In general, below cost selling in the grocery trade was seldom used for this purpose. It is a promotional device intended to attract customers to the store and to convince the customers that a particular store has a low price policy for its basket of goods. In practice, below cost selling as used in the grocery trade does not result in price reductions but merely emphasises low prices on some products and high prices on other products. A small proportion of better known items would be sold below cost to attract customers to the retailers. This reduction in the price of some
59 items can be afforded by increasing the prices on less well-known products whose price the customer is unable to remember. Essentially most customers would not benefit from this practice because the overall cost of a shopping basket would remain generally unchanged. Below cost selling, therefore, as ordinarily practised, cannot be considered to be predatory pricing.
However, below cost selling could be used to eliminate competitors in local areas where there may be only one or a small number of competitors to a branch of a multiple store. It would be very easy in such circumstances for a store in a particular town to sell at different prices than in all other outlets so as to eliminate a competitor. Undoubtedly, such an action would be predatory pricing. However, if the multiple store was not in a dominant position in the State or in a substantial part of the State, it would not be possible to take action under Section 5 of the Competition Act. Although, it is sometimes argued that, because of ease of entry to the market, it would not be possible for the multiple to recover the cost of its predatory actions by subsequently raising its prices, in practice it would be able to do so. The fact that it had managed to put a competitor out of business would be a serious deterrent to new entrants to a local market.
Similarly, the Groceries Order would prevent a large multiple from engaging in predatory action by using below cost selling on a national basis. It would not prevent a large multiple from consistently selling below its true costs including its employee remuneration and other overhead costs. However, as the effect of selling below its true cost without the deep price cuts which the ability to sell below cost gives, is less likely to have an impact with consumers, then the ban on below cost selling makes it much less likely that predatory action of this type will take place.
Because of the levels of market shares of the major retailers, it is very likely that the Competition Authority and the courts would not accept that they are in a dominant position. While many in the grocery trade would argue that Tesco, because of its economic power and, in particular, because of its buying power, is in a dominant position, there would be no certainty that the courts would accept this view. Similarly, some of the other companies in the grocery trade have significant market power and
60 could sustain substantial losses for some years in order to ensure that there was less competition in the market in the future. Again, there is uncertainty as to how the courts would interpret such market power and as to whether they would consider unfair actions by such companies as being an abuse of a dominant position.
6. Economic Analysis
Theory The Competition and Mergers Review Group received a number of submissions on the Groceries Order. An analysis of these submissions shows that none of those who were opposed to the continuation of the Order were involved with the grocery trade. The Tanaiste stated in the Dail in February 1999 that she had not received any submissions looking for the abolition of the Order. Most of the opposition comes from those with a background in economics who are applying economic theory in giving their view on whether the Groceries Order should be retained or not. They conclude that, on the basis of the principles they generally accept, that there is no case for the retention of the ban on below cost selling.
However, the economic theory in relation to competition is a constantly evolving one. There is no clear set of economic principles on which economists agree which can lead to a view as to whether the Groceries Order is good or bad.
Perhaps it is understandable that those who have been trained in or studied economics will be sceptical of the type of provisions contained in the Groceries Order. Economics deals with perfect markets, contestable markets and theories of perfect competition. There are a number of reasons why these theories may not be applicable to today’s modern, sophisticated, grocery trade. It is essential that those who advocate the abolition of the Order should consider the barriers below to the operation of a perfect market in groceries. The existence of these inhibitions on perfect competition creates the necessity for a provision such as a ban on below cost selling.
Barriers to Perfect Competition
61 1. Restriction of Offer
In theory, if a grocer sells goods below cost, other grocers will purchase those goods because they will be cheaper than the price they have to pay for their products. In these circumstances, no grocer would sell goods below cost. However, under common law, retailers are permitted to restrict the offer they make for the sale of goods. Thus a retailer can sell butter below cost on the basis of one kilo of butter for every £20 of goods sold. A retailer can also simply decide not to sell a particular product to a particular customer. Thus if a retailer realises that another retailer is purchasing the below cost goods, supplies can be refused. In a perfect market situation, retailers selling goods below cost would have to sell them to any purchaser. If this happened, no sales below cost would take place. Thus, it is the interference in the market of the common law permission for a restriction of offer which makes it possible to sell below cost. This, in turn, makes it necessary to prohibit below cost selling.
2. Numbers of products in store
The theory of perfect competition assumes that the purchaser can compare the price of the goods being offered with the prices of goods previously purchased or with the prices of goods offered by other suppliers.
In the modern grocery supermarket, there can be up to 20,000 products. It is not possible for the consumer generally to remember more than the prices of 100 products. Many will not be able to remember the prices of more than a few products. Irrespective of the method of pricing the products, the consumer could not possibly even remember a small proportion of the prices in the modern supermarket. However, the consumer’s ability to remember prices has been greatly reduced by the development of scanning systems. The price of the product no longer appears on the product itself. The consumer, in any event, is at present only concerned with the price of the overall shopping basket of goods. The consumer is concerned that the cost of the shopping basket of goods purchased is not greater than the cost of purchasing those goods in other accessible supermarkets. The total cost of the shopping basket is a measurable amount which comes out of the weekly or monthly expenditure of consumers.
If the consumer is unable to remember the prices of the goods being purchased, we
62 have an imperfect market. The purchaser is not able to make a logical and rational decision on price in these circumstances. The consumer can be misled by reductions in the prices of the best known items (those most likely to be remembered by the consumer) and increases in the prices of other products.
Again, this clear distinction between the reality of the modern grocery trade and the economic theory of the perfect market is a reason why a ban on below cost selling is needed.
3. Consumers
The ban on below cost selling assists consumers to make economic choices about the food that they purchase. The absence of sales of goods below cost ensures that the decision to purchase one food rather than another is based on the usefulness or otherwise of that product in their total shopping basket. Where there is a ban on below cost selling, some goods are unfairly discriminated against and others, because the retailer judges that the consumer is likely to remember the prices, will be unfairly lower in price. Thus below cost selling distorts the pattern of consumer behaviour between products and leads to a false allocation of resources and supplies within the supply sector.
4. Balance of Power
The modern supermarket multiple has very considerable market power. Where a multiple is responsible for 20% of the purchases from a supplier, then the decisions of the multiple in relation to the listing of products, shelf positioning, inclusion in advertising and promotion etc. are of major significance to the supplier. If the multiple not only purchases for the Irish market but also for markets in other countries, then the market power of the multiple further increases. In these circumstances, it is necessary to provide fair trading arrangements between buyers with significant market power and suppliers with limited power. The only power of suppliers is in relation to the development of brands through advertising and promotion. If the supplier can, by appealing directly to consumers, generate a demand for the product, it may be difficult for the retailer to not stock the product. However, increasingly, retailers also offer own-brand products which compete directly with the brands of suppliers. Retailers do not need the branded products of suppliers except in very few cases.
63 If retailers obtain an excess of power, this in turn will have a damaging effect on producers and processors. It must be remembered that retailers do not export products from Ireland. It is the processors who do so. If the processors in Ireland are damaged through the operation of excessive power by the retailers, then Irish exports will suffer.
5. Market Structure
Although European competition law and Irish competition law does not at present recognise the importance of market structure, it is one of the underlying principles of US anti-trust law that “monopolisation” be prevented. It is clear that, in order to ensure that there is competition in the future, it is necessary to have a reasonable number of competitors. The concentration levels in the Irish grocery market are already high. Any action which may inhibit a growth in concentration preserves the existing level of competition.
It must be clearly understood that if concentration were to increase substantially, as it is believed would happen if the ban on below cost selling and the other provisions of the Order were removed, then competition would be reduced and the ability of retailers to collude on prices and margins would be greatly increased. In a non- competitive market, consumer prices will rise and innovation and development within the grocery trade in relation to products and services will diminish.
If concentration levels increase to an unacceptable extent, it will not be possible to bring about a reversal of the situation. It would be necessary for a new law to require the sell off of certain supermarkets by some multiples to reduce their market shares to acceptable proportions. This would be a much greater interference in the market than anything which may take place as a result of the ban on below cost selling.
6. Effects on Other Sectors
The definition of grocery products contained in the Order refers to food products and household necessities normally purchased in a grocery shop. Household necessities includes detergents, bulbs, soaps and some toiletries.
However, it is very important to realise the developments that have taken place in
64 supermarket retailing. The modern grocery store can deal in the following sectors which were not formerly considered to be grocery goods: -
• off-licences • hardware • gardening • newsagents • toys • clothing • toiletries
Thus any action taken by a grocery retailer to reduce the prices of groceries below cost can partly be recovered by increasing the sales of non-food items. Obviously, this ability to reduce the food price below cost, while recovering the losses on increased sales in other products, makes it impossible for those specialising in particular product areas to compete. Thus an off-licence company cannot react to the sales of beer or spirit products being sold below cost. A specialist drapery retailer cannot sell their goods below cost because they have to recover the loss somewhere else in their clothing goods. The permission for grocery multiples to sell food below cost will impact not only on the grocery trade but upon most retailing sectors. The decision as to whether grocers should be allowed to sell grocery products below cost is therefore of a wider significance than for the grocery trade.
Again, the ability of grocers to sell food products below cost, while recovering the losses on other products, is a distortion of the market. It prevents or restricts competition in other trade sectors.
7. Response to the DKM Economic Consultants Limited Report on the Economic Impact of the 1987 Groceries Order
The Groceries Order has been in existence for almost eleven years. It is necessary for those who wish to have the Order abolished or revoked to justify the reasons for so doing. The DKM report states that those who made submissions to the Review Group
65 were not able to demonstrate to the satisfaction of DKM the tangible benefits being achieved. However, DKM was unable to demonstrate any restrictions or distortions in the market arising from the operation of the Groceries Order.
A number of statements contained in the report can be accepted.
“We would state….that the ban on below cost selling is unlikely to the grocery trade and trends in market structure including the overall numbers of outlets and concentration.” (Pages 23 and 24)
“The existing Groceries Order…does not prevent price wars of an across the board type.” (Page 29)
“We have concluded that the available evidence is inadequate to support categorical attributions of movements in prices and margins to the impact of the Groceries Order.” (Page 41)
“We have concluded that the likely impact of a removal of the ban on below cost selling would be limited.” (Page 41)
Given that the abolition of the Order would not bring any significant benefits to consumers or to competition it can be reasonably asked why the Order should be abolished.
The IBEC Competition Council and the Food, Drink and Tobacco Federation believes that the abolition of the Order will have harmful effects on small grocers, suppliers to supermarkets and consumers.
This chapter demonstrates elsewhere what these effects are. DKM confined their examination of the issues to the submissions received by the Review Group and previous reports of the Fair Trade Commission and to discussions with IBEC and the Competition Authority. DKM did not discuss the result of competition in the grocery trade to any great extent with individual suppliers or retailers and did not have the benefit of their insights or experience, (save through discussions with IBEC). In addition, no examination was made of the position in Northern Ireland or Britain
66 where below cost selling has been taking place or the United States which has had fair trading provisions for over sixty years.
One of the arguments put forward by DKM (page 35) is that the principal and immediate impact of the Order is to facilitate a form of minimum price maintenance. Nevertheless, on page 21, DKM state that the "it is important to understand that resale price maintenance removes the price discretion from the retailer, channelling competition into non-price areas. A below cost selling ban does not do this, since retailers are free to charge at any level down to a gross margin of zero (ignoring discounts)". It is clear, therefore, that a ban on below cost selling is not a form of resale price maintenance. The Order specifically prohibits resale price maintenance as does the Competition Act of 1991. The Director or the Competition Authority could intervene in any case where the provisions in relation to invoice price are bringing about a form of resale price maintenance.
DKM state that, "the law does not protect consumers against promotional activity by sellers in any general way...". The advocates of the Order are not arguing for protection of the consumer. They argue that, because the consumer cannot remember prices, the grocery market does not operate in the way that economists envisage markets operating. If the consumer cannot remember the prices of the products being purchased and is unable to compare the prices with the prices in other shops, or even the prices of other products then there is market failure. DKM could find no evidence that the Order is having a harmful effect. Yet, they advocate removal of the Order. Surely the collective view of the grocery trade that the Order should be retained must carry greater weight than a conclusion reached by DKM after a necessarily brief examination of the issue?
8. Employment
The Number of Persons Engaged in the Retail Grocery Trade for 1991: Full-time Part-time No. of Proprietors Total Retail Sale in Non-Specialised Stores 16,670 13,137 7,875 37,682 Retail Sale in Specialised Stores 4,032 1,923 4,240 10,195 Total 20,702 15,060 12,115 47,877
67 The Number of Persons Engaged in the Retail Grocery Trade for 1997 Full-time Part-time No. of Proprietors Total Retail Sale in Non-Specialised Stores 21,000 33,816 8,600 63,416 Retail Sale in Specialised Stores 4,388 2,374 2,932 9,694 Total 25,388 36,190 11,532 73,110 Source: Annual Services Inquiry of CSO
The number of persons employed in the retail grocery trade has grown from 47,877 in 1991 to 73, 110 in 1997.
Regrettably, we do not have access to information under these headings prior to 1991 or for 1998. The numbers employed in non-specialised stores or grocery stores grew by 68% between 1991 and 1997. While a significant part of this growth was of part- time employees, there was also a growth of 26% in full-time employees. The numbers of proprietors and their family members increased as well.
The section on suppliers shows the numbers employed in food processing at the end of 1997. There were 40,500 persons employed in this sector.
In addition, there are employees in importers and distributors and wholesalers serving the grocery trade. The CSO Annual Services Enquiry 1997 shows that there were 11,046 persons engaged in the wholesale of food, beverages and tobacco.
In addition, grocery trade employment must take into account the numbers engaged in developing new retail outlets, new food factories as well as the refurbishment and redevelopment of existing ones. It has not been possible to obtain any statistics on the numbers of persons engaged in such activity. The census of population for 1996 showed that there were a total of 109,798 persons engaged in building and construction. This is compared with 87,661 in 1991. The monthly employment index for 1997 showed an increase of 9.3%. The number employed in the construction industry for 1997 was, therefore, about 120,000.
The total of all construction output in 1996 amounted to £6,138 million. Of this amount, industry accounted for £395 million and commercial £407 million, a total of £802 million. It is not possible to analyse the industry and commercial totals into categories for food processing enterprises or retail grocery outlets. A total of industry
68 and commercial output is 13% of the total in construction output. If this was applied to the number of employees in the construction industry this would be 15,680 employees. However, it is unlikely that food processing and retail developments would be more than 30% of this total. This would leave the numbers employed in the construction industry related to the grocery trade at perhaps 4,700.
If the Order is revoked, the first victim will be the confidence of independent retailers. Independent retailers will cease to invest in their stores until such time as the full impact of below cost selling activity has been assessed. In time, it is believed that many independent retailers will seek to end their involvement in the grocery trade by selling their stores or converting their stores to other uses.
The IBEC Competition Council believes that, if the ban on below cost selling is removed, it will have a significant effect on employment related to the retail grocery trade. Any estimate of the effect can only be based on the experiences of those who have spent a great deal of their lives in the grocery trade. The grocery trade members of the Competition Council believe that the reduction in the numbers of employees would be significant.
Undoubtedly, if the ban on below cost selling was removed, this would not affect the consumption of food or of grocery products. However, the renewed emphasis on price as the major competitive weapon is likely to lead to a reduction in the standards of the stores and the level of service to consumers. For example, a decision by a retailer to pack bags at the checkout will result in a higher number of persons being employed than if bags are not packed. The decision by retailer to have extended opening hours, results in a greater number of persons employed. Arguably, extended opening hours do not increase the total volume of grocery products consumed. However, extended opening hours facilitate consumers. A reduction in the product ranges will reduce costs for retailers and allow for price reductions but will seriously affect the choice which consumers have. If the emphasis is on the price of products only, then it would seem likely that the product ranges will be reduced.
If, as is expected, below cost selling results in many fewer grocery shops, then this may reduce costs in the distribution chain in the narrow sense of the costs from
69 production to retail sale. However, the consumer will have to expend more time in travelling to stores and will also be involved in the cost of travelling as well as the general inconvenience of having to do so.
These are some examples of what might happen if the ban is removed. These examples would result in substantial reductions in employment in the retail grocery sector and the general distribution system.
9. Effects of below cost selling
This section illustrates the consequences of revoking the ban on below cost selling. The information has been provided by a supplier with very many years of experience in the grocery trade.
Retailer “A”, a major supermarket multiple, reduces a product or products to below cost and advertises the promotion in the media (national or local) with the objective of attracting more consumers to its stores.
Effects on retailer Retailer A may increase selling prices on other products within its 10,000-20,000 product range to compensate for the loss of profit on their loss leader promotion.
Retailer A’s competitors may react in the following ways: a) within hours the principal competitors will match or better A’s prices and demand a reduced price from their suppliers in order that they may maintain their gross margin while selling at reduced prices; and/or b) delist the products involved or reduce support and shelf space of the loss leaders; and/or c) Put their support behind a competitive product to the loss leader or a different size of the same brand;
70 and/or d) Compete with Retailer A using their discounted brand
Only large retailers can compete in price wars and hope to be successful. They need a large range (10,000-20,000) of products spread across many different categories to maintain their profit objective. Alternatively, if they are part of a multi-national group which can subsidise their Irish operation or a retailer who has significant amounts of business outside the grocery area, they can survive a below cost selling war.
When a serious price war develops, it has the effect of attracting more consumers to the larger retailers to buy the “bargains” and while they are in the store, they are likely to buy the rest of their weekly shopping, of which some items may be at inflated prices. There is then a loss of business to the smaller retailer and speciality store who cannot compete on range or media advertising. This leads to further concentration of trade.
The small retailer cannot buy the below cost products from large retailers for resale because of the ability of retailers to restrict their offer under common law.
The small retailer and symbol group owners will not have the confidence to re-invest in their stores during price wars because of uncertain profits leading to further concentration of trade to the larger multiples.
Effect on Consumers
A consumer can only remember a limited number of product prices. Therefore, if they are attracted to a store by a loss leader, they tend to believe that all products are of good value in that store, which is unlikely to be the case. They will buy their weekly shopping basket – which in total may be about the same price as they pay to their normal retailer.
Below cost selling prices and their attendant delisting and short term pricing tend to reduce consumer choice. Retailers will delist brands and sizes which have been sold at very low prices in other stores. This will add to the confusion of what is good value.
Price wars lead to further concentration of trade and will reduce consumer choice of
71 good quality independent and symbol stores available in their locality.
Effect on suppliers – discontinuity
• Artificial peaks and falls in demand with very short notice leading to disruption to production lines, overstocks, stock outs. These add to suppliers costs. In due course these costs must be passed on to consumers.
• Disgruntled customers who will demand increasingly large discounts. • Withdrawal of support by customers. • Delistings • Long-term increasing concentration of trade and less customers to resell their products.
While a retailer with a 20% market share is not in a dominant position if they de-list or seriously reduce support for a product, the manufacturer or supplier will suddenly lose 20% of their home market business through no fault of their own. This will cause inefficiencies through higher stocks, reduced production and a huge waste of management time. It must be remembered that, while it is 20% of the manufacturers business in Ireland, it is very unlikely to be more than half of a percent of the retailer’s business, which they will recover through giving more support to their own label or a competitive product.
Price wars are the classic way for supermarkets to gain market share especially new entrants to the market. For example, Walmart, after taking over Asda, are reducing prices in the UK to compete with Tesco and Sainsbury.
Comment
Other features of below cost selling activity include short term reductions in prices while stocks last, offers which are directed to a number of items per customer, extensive price advertising which has an impact throughout the country and not confined to the areas served by the supermarket reducing prices. In general, consumers do not believe that retailers sell below cost. They believe that the retailers selling above cost are “ripping them off”. No retailer wants to be thought to be selling at uncompetitive prices by its customers. This leads in turn to the delisting of the
72 products being advertised.
It must be remembered that below cost selling activity is taking place in the British market for quite a number of years at the same time as British supermarkets have the highest net profit to sales in the Western world.
Consumers are greatly affected by below cost sale offers. If a product normally sells at 40p and it is offered for sale at 10p, consumers will regard those selling at 40p as exploiting them. Consumers will transfer their business from independent stores to multiple supermarkets in these circumstances.
10. British Market
On 8th April 1999 the United Kingdom Director General of Fair Trading announced that he had referred the grocery retailing sector in the United Kingdom to the Competition Commission for investigation.
The Commission has been asked to report within one year on, inter alia, whether any facts found by the Commission may be expected to operate against the public interest. The Office of Fair Trading enquiry prior to the referral to the Commission had raised several competition issues. The most important of these were:
• The nature, extent and existence of barriers to entry to the market. • The extent to which land is increasingly impacting on the structure of competing firms. • The intensity of price competition at local, regional and national levels. • The nature of the relationship between the multiples and their suppliers, including agricultural producers and the ways in which buyer power is exerted.
The Director of the Office of Fair Trading stated that he is not satisfied that competition between existing grocery retailers is effective. He stated that he is concerned that grocery prices are often set to match competitors rather to undercut them particularly in catchment areas where consumers have a limited choice of supermarkets.
73 This investigation by the Competition Commission is of very considerable importance to the grocery trade in the United Kingdom. The findings of the Competition Commission will have an impact on the future law in relation to grocery retailing throughout Europe.
It is noteworthy that the lack of competition, to which the Director refers, has occurred in spite of the ability of the multiple grocers to sell below cost. It is clear that the ability to sell below cost is not in any sense a precondition for vigorous competition in the grocery trade.
It is likely that the Competition Commission will consider the issue of below cost selling and the general decline of the independent sector in Britain. It would seem premature, at the least, to consider any revocation of the Groceries Order until the UK Competition Commission presents its report.
11. Northern Ireland Market
Estimated Market Shares 1994% 1999% Stewarts / CP 25 31 Tesco Wellworths 18 8 Safeway Sainsbury - 12 Sainsbury Dunnes 8 6 Dunnes M&S 3 4 M&S Co-Op 6 6 Co-Op Iceland 1 4 Iceland sub Multiple 61 71 SuperValu - 8 Other Independents 39 21 sub Independents 39 29 TOTAL 100 100
It will be seen from the above table that, since 1994, the share of the market held by
74 independent grocers has fallen from 39% to 21%. This has been partly due to the entry to the market of Sainsbury and the building of new stores by Tesco and Safeway. The significant changes have been partly due to the ability to sell below cost in the Northern Ireland market This facility has been availed of by some of the principal participants.
While consumers may have benefited from the building of additional stores, many independent shops have closed or will inevitably close. Thus consumer choice of grocery shop has been curtailed.
The “other independents” total includes symbol stores such as Spar and Mace. SuperValu entered the market by purchasing the smaller Wellworth stores. The larger Wellworth stores were transferred to a joint venture between the Fitzwilton Group and Safeway.
It is interesting that Tesco have gained market share in the Northern Ireland market as compared with the shares previously held by Stewarts/Crazy Prices. This gain in market share is in spite of the entry to the market of Sainsbury and the increase in the number of Iceland stores. This contrasts with the position of Tesco in the Republic of Ireland market.
75 Chapter 7 Arguments Against Retention of the Groceries Order
1. Summary
1.1 The main case against the Groceries Order is a simple one: it restricts price competition. In doing so, it encourages non-price competition (e.g. stamps, loyalty cards, bonuses, free flights, etc.). Non-price competition in general involves employing scarce economic resources. Hence, by restricting price competition and encouraging non-price competition it damages consumer welfare twice: consumers face higher prices, and resources which could be used for other purposes (and improve consumer welfare in the process) are used up unnecessarily.
1.2 Modern economic theory, (which far from concentrating on perfect competition, expressly grapples with the problems of industrial structure, market power, concentrated markets and imperfect information on the part of all the participants in the market) points to a connection between non-price competition, sunk costs and reduced competition through increased concentration and higher entry costs26. Hence, a second problem arising from the Groceries Order is that it is predicted to reduce the intensity of competitive pressure in the groceries sector. It induces increased non-price competition between large retailers. Suppliers and those arguing for the retention of the order highlight this as a positive outcome of the Order. Sutton27 in case studies of food and drink sectors across seven countries, shows that an escalation in non-price competition (involving sunk cost expenditures) drives markets into a more concentrated structure (see also and Walsh and Whelan, 199928). This mechanism can be observed in the Dublin area
26 John Sutton: Sunk Costs and Market Structures, Cambridge, Mass., and London, MIT Press, 1995. 27 Op.cit. 28 Walsh and Whelan (1999), 'Loss-Leading and Price Intervention in Multi-Product Retailing: Welfare Outcomes in a Second Best World', The International Review of Law and Economics, Vol.19, No.3.
76 since 1987. Using the Sutton framework, Walsh and Whelan, 199928, examine restrictions on loss leading by supermarket retailers and the induced escalations in service expenditures on retail concentration. They predict such a mechanism will lead to higher prices and a more concentrated market structure over-time. Competition between large retailers is only in large urban areas where the density of population can support many competing large firms. Concentration and service (non-price) competition has increased dramatically since the introduction of the Order in 1987. As stated by the OECD,29, the rescinding of the Order would encourage a shift to price competition that has no associated sunk cost. This would benefit a sector that until recently was not exposed to international retail competition. More entry and price competition would be encouraged in urban areas.
1.3 Arguments advanced to justify retention of the Order on employment and output grounds, using data from the food processing sector, are misleading. Growth in output and employment in that sector since 1987 is capable of being explained convincingly without any resort to the Groceries Order, while no plausible causative mechanism between the Order and the performance of the sector is identified and/or quantified. It is true that economic activity and the level of employment in food processing has grown since 1987. Yet it can also be said that 1987, the year that fiscal stabilisation began, marks the turning point in all of economic performance in Ireland. It is likely that the aggregated business cycle, and not the Groceries Order, led to the growing demand for food products and dictated the evolution of the food processing industry. Having said this, the Groceries Order is likely to have shifted power and rents back upstream to suppliers. While employment has grown, price cost margins are also likely to have been inflated, a point omitted from the analysis in section 2 of Chapter 6.
1.4 Arguments for the retention of the Order as a means of encouraging indigenous suppliers to the grocery sector are unacceptable on two grounds. The first is that even if it could be shown that the Order does indeed encourage indigenous firms,
29 OECD (1993), Economic Surveys - Ireland 1993.
77 it is simply bad policy design to weaken competition as a surrogate instrument of industrial policy. Optimal intervention requires that a direct rather than an indirect policy instrument be used. In other words, don't weaken competition: offer direct and transparent encouragement. The second is that policy instruments aimed at encouraging indigenous suppliers constitute state aids to industry, and as such at best must be cleared with the EU Commission, and at worst are incompatible with the Treaties of Rome, Maastrict and Amsterdam.
1.5 Arguments advanced to support retention of the Groceries Order based on maintaining the competitive position of independents are confused, to some extent self-condtradictory and in any case unqualified. "Independents" (smaller outlets, whether or not part of a chain) survive in one of two segments of the market. The first is as niche outlets in geographical markets where the large multiple outlets operate. They offer a different but to some extent over-lapping portfolio of goods; they open at different hours; they offer immediate availability (as opposed to having to go to a shopping centre) as convenience stores. As such, they are imperfect substitutes for the services of the multiples and to that extent are protected from the effects of increased competition within the multiples sector. The importance of independent shops for impulse products, in terms of total product sales, can be as high as 80 per cent. Independents tend to be the main market for 'impulse' products, such as Chocolate Countlines, but a fringe market for the 'top-up' items, such as Cat Food. The Multiples operate in the one stop shopping niche whereas the Independents operate in the convenience shopping niche. The second is the supply of grocery retailing services in geographical areas where the population density is insufficient to support the activities of the large multiples. It is true that the independent retail trade had retained a credible market share in the one stop shop grocery trade since 1987. Yet, this is only a feature of rural areas where the clusters of population are not dense enough to attract competition between the big players of the national market. Since 1987 Multiples share of the grocery market in the Dublin are steadily increased to 80 per cent by 1996. Independents and Multiples in the Dublin area have evolved to compete inseparate market niches, as argued in
78 Walsh and Whelan30. The confusion and self-contradictions arise from the argument that they need to be protected from competition because they offer a qualitatively different service from that offered by the multiples. But if, and to the extent that they do this, they are sheltered from competition. If they need regulation to protect them, they do that extent do not offer a qualitatively different service. If in the absence of such regulation the independents lose market share it is precisely because consumers switch from them to the multiples on a volumtary basis, and as a whole enjoy higher consumer welfare. There will, of course, be gainers and losers: a reduced availability of convenience stores or local groceries will reduce the welfare of some consumers, but consumers as a whole have gained if this is due to consumers having swithched to multiples as a result of competition. If there are social (as opposed to private) welfare problems involved in a fall in "local" service availability, the correct response on the part of the Government is not to reduce competition, but to offer subvention to "local" service providers.
1.6 The argument that pressure to abolish the Groceries Order comes in the main from academic economists, while consumers and retailers have not pressed for change betrays a complete failure to understand the political economy of public choice. First, note that it is producer interest groups and unions which are lobbying for retention. That suggests that it is producer interests and union interests which are primarily threatened by an abolition of the Order. Secondly, note that retailers as a group, like any other suppliers, are predicted to favour regulations which discourage price competition between incumbents and entry by potential competitiors, both of whch are predicted consequences of the Groceries Order. Similarly, existing retailers are content that the planning law restrictions on new developments should be enforced. Third, note that it is a universal aspect of lobbying to create and protect rents31 which arise where the costs are not easily discerned, and are spread thinly over a large number of individuals, while the benefits are concentrated among a relatively small number of beneficiaries. In
30 Walsh, P.P. and Whelan, C. (1999a),'A Rationale for Repealing the 1987 Groceries Order', The Economic and Social Review, Vol.30, No.1, pp.71-90. 31 A return above that which would be produced by perfect competition.
79 such circumstances the latter (the suppliers) have stronger incentives to act collectively than the former (the consumers).
1.7 The use of invoices as a basis for regualtion price comptition by retailers offers suppliers a means of reducing price competition between suppliers. It is equivalent in effect to a credible pre-commitment not to engage in price information between suppliers while the regulation implies legal sanction being imposed on reductions in prices not accompanied by reductions in invoice prices. In this respect, the Groceries Order operates in the same way as the Net Book Agreeement did in reducing price competition between publishers as well as between bookstores.
1.8 It is sometimes argued that the Groceries Order fulfils a purpose similar to a ban on price discrimination which, it is argued, can be anti-competitive where it strengthens buyer-seller relationships and may thus raise barriers to entry. Prohibitions on price discrimination (such as that contained in the US Robinson- Patman Act) have been heavily criticised32. The Report by the Independent Committee of Inquiry into National Competition Policy in Australia, which reported in 1993, examined among other things the prohibition in Australian law against price discrimination and recommended that it should be repealed on the basis that it was contrary to the objective of economic efficiency and had not been of assistance to small businesses. It stated that "The Committee does not believe that it is the role of the competitive rules to protect any particular sector of society
32 "The effect of legislation has been the encouragement of price uniformity, and the discouragement of price competition. The Act has been roundly criticised for its chilling effect on competition, its anti-efficiency objectives, and its damaging restrictions on the freedom of the market. It is often perceived as a measure to protect competitors rather than one to protect competition.". Frazer, Monopoly, Competition and the Law (1992), p62. "Economists contended that, especially in oligopolistic industries, unsystematic price discrimation was an important instrument for upsetting collusive price structures: that preventing discounts to high volume purchasers could inhibit efficiency-enhancing innovations in relation to distribution: and that the other efficiency effects of systematic price discrimination could be positive as well as negative." Sherer, Competition Policy for an Integrated World Economy (1994) p73. "The Robinson-Patman Act is the purist embodiment of the populist trend in American anti-trust legislation, one which arguably seeks to codify equality of treatment - a "level playing field"- as a goal independent of economic efficiency and consumer welfare." MacAvoy, At What Price May Seller Sell? in Legal Aspects of Selling and Buying, (Philip F. Zeidman ed.,1991) p 85-86.
80 and does not believe that the competition rules should be used to achieve objectives contrary to economic efficiency"33.
1.9 Finally, the argument that since there is an absence of hard numbers on the impact of the Groceries Order it would be foolish to abolish it is disingenuous. In the case of the minimum wage, the fact that it is hard to descern the employment cost. It simply means that it is hard to measure, and that for small changes in the minimum wage the incremental employment costs may be small. Few people seriously argue that the absence of clear measures of the costs means that it has no effects, or, even less the case, that a minimun wage actually increases economic welfare by increasing employment. In the case of the Groceries Order, the counter-factual, an Irish groceries market without the Order, cannot be observed. Identifying and precisely quantifying the impact of the Order on consumer prices during a decade of enormous change in the structure of the market may be difficult, but it is not an impossible task. That it has not been done cannot be used as a justification for maintining an Order which is known to have the effects predicted by economic analysis simply because the extent of those effects has not been determined.
33 Report by the Independent Committee of Inquiry into National Competition Policy. Australian Government Publishing, August 1993, p74. The report noted that "In a 1977 review of the Robinson-Patman Act, the US Department of Justice condemned that Act a having failed to achieve any of its aims and as having harmed competition by imposing rigid pricing in oligopolistic markets where firms have used the law to prevent competitors from engaging in price cutting" (p78-79). The Committee concluded that it did not "consider that competition policy should be distorted to provide special protection to any interest group, including small business, particularly where this is substantially to the detriment of the welfare of the community as a whole. Sectoral assistance policy of this sort is generally more efficiently implemented by more open and direct assistance, including budgetary and taxation measures of various kinds." (p79-80)
81 2. Supplier Analysis
2.1 The analysis of statistics on production and employment levels in Food and Drink Processing Industries undertaken in the IBEC arguments reproduced in Chapter 6 were based on the intervals 1977 through 1987 and 1987 through 1998. On the basis of their findings it was argued that the boom period in these industries came after 1987 and the implementation of the Groceries Order and ban on below cost selling. The business cycle over the period in Ireland is well known. This grouping of time periods does not reveal the true employment cycles across manufacturing sub-sectors. The following table reveals a strong boom period in the period between 1974-79, a very deep recession in the period between 1979-87 and another boom period between 1987-91 and a recession 1991-93.
The Year to Year Employment Growth in Total Irish Manufacturing
Year 1974 1975 1976 1977 1978 1979 1980 NET Growth 0.4 -3.6 2.0 2.1 32 4.0 -2.8 Year 1981 1982 1983 1984 1985 1986 1987 NET Growth -1.5 -2.9 -4.7 -3.7 -3.1 -2.1 -3.5 Year 1988 1989 1990 1991 1992 1993 1994 NET Growth 1.0 2.6 0.8 -0.3 -0.3 -1.3 3.9
Source: Barry, Strobl and Walsh34
Grouping all years from 1979 prior to 1987 and those after 1987 would clearly not capture the true employment cycle. In addition the deep recession period 1979-87 is clearly driven by macroeconomic factors such as ERM entry, the abolition of the common external tariffs, and the fiscal crisis. Such trends in the Food and Drink Processing Industries clearly had nothing to do with the absence of a ban on below cost selling under the Grocery Order. A similar argument follows in relation to the periods after the Groceries Order was introduced. A more interesting analysis would have documented suppliers price cost margins
34 Barry, F., E. Strobl and P.P. Walsh (1998) "Aggregate Job Creation and Job Destruction and Job Turnover in the Irish Manufacturing Sector", The Economic and Social Review, Vol.29,
82 before and after the introduction of the Order. Irrespective of the business cycle, were suppliers extracting more rent per unit of sale after 1987?
2.2 It does not seem that the ban on below cost selling introduced in the 1987 Order creates a fair trading environment between suppliers and retailers, but rather that it gives suppliers power over resale pricing. This has most likely shifted rents upstream towards suppliers.
2.3 The impact of international competition on the Irish Grocery market is uncertain. It is certainly going to create an upheaval for Irish consumers, suppliers and retailers. The Irish market size can only accommodate a limited number of stores. Clearly Irish retailers have had the first mover advantage in terms of the store location and the emphasis on the branded nature of the products sold. Mergers and acquisitions will continue to be regulated by the Minister and the Competition Authority. If consumers move towards cheap branded items, which is their right, this is bad news for Irish Suppliers. Yet, if suppliers produce quality goods at the right price and the retail market becomes more competitive this will have an overall positive impact on the welfare of all parties concerned. The forces of globalization on the Irish Grocery market will work themselves through, irrespective of whether or not the Grocery Order remains. Yet laws that protect the interest of suppliers over retailers during such exogenous changes should not be upheld.
2.4 The threat of suppliers to cease distribution to a retailer in an endeavour to bring about an end to the below cost selling activity is not a credible one. This is particularly true in the face of import competition and the potential emergence of own labels. Clearly, a brand that is picked out for loss leading enjoys a free promotion campaign that would be good for the long-term success of the brand. If loss leading is on branded Irish goods and not on own label goods this will be good for the survival of Irish suppliers in the face of international competition. 3. Consumer Analysis
No.1, pp 55-71.
83 3.1 The examination of trends in CPI or Food indices is largely a waste of time. It can not lead to any conclusions as to the ability of suppliers/retailers to extract increased (decreased) consumer surplus post 1987 in Ireland compared to the UK. Variations in net incomes, composition of food products, retailers costs, population densities, competition in retail markets, exchange rates. VAT taxes make such an exercise very difficult.
3.2 It is agreed that statistical analysis up to this point has not made it possible to quantify the effect of the Groceries Order. That does not mean it has not had an effect. Economic theory predicts as a matter of simple logic that in the presence of increased supplier bargaining power over retailers and in the presence of an escalation in service expenditures, consumers will bear the burden of higher input costs in the form of higher grocery prices.
3.3 A move away from resale price maintenance and non-price competition and towards price competition will result from rescinding the Groceries Order. The loss-leading analysis of Walsh and Whelan35 predicts such a movement to reduce the overall expenditure by consumers on their grocery baskets of goods. Other non-price means of competing such as parking convenience, advertising and promotions, have associated sunk cost expenditures. Someone has to pay for such expenditures. Economic theory suggests that consumers benefit from these extras, but they also have to pay for the different forms of non-price competition and are worse off overall as a result. Price competition does not carry such baggage.
3.4 The analysis of the evolution of concentration levels within the grocery market in urban versus rural areas in the next section of this Chapter indicates that concentration in the Dublin area can only decrease with a reduction in non-price competition. This will yield more choice and lower prices for consumers.
35 Walsh and Whelan (1999b), ‘Loss-Leading and Price Intervention in Multi-Product Retailing: Welfare Outcomes in a Second Best World’, The International Review of Law and Economics, Vol.19, No.3.
84 3.5 In relation to the proposed negative effects of removing the Order, the reduction in suppliers’ mark-ups is likely to be passed on to consumers, as the increased price competition between retailers is intensified. Independents in rural areas should not expect the rescinding of the order to induce entry into their isolated markets. Their focus on smaller consumer segments will shelter them. Independents in urban areas are protected by the fact they have carved out a strategic convenience niche in the market over-time. This will protect them from the effects of increased price competition between the large retailers.
4 Retail Analyis
4.1 Historically the Irish retail grocery market was characterised by a fragmented structure. This sector has experienced mass structured upheaval since the development of supermarkets in the 1970s36. In contrast tot he structure of earlier decades, modern grocery retailing is highly concentrated with the top 5% of outlets accounting for almost 70% of total food turnover. Market share data show Multiples, which describe larger supermarkets operating with several branches, dominating in Dublin and other densely populated areas around the country. Symbol Groups and Independents retailers dominate elsewhere. Multiples have not entered many regional areas where the market in the surrounding areas is insufficient to justify their entry. In these areas, Symbols and Independents jointly cater for both "one-stop" and "convenience" shopping.
Figure 1: Retail Food Concentration: 1977-1996
36 Walsh, P.P. and Whelan, C. (199a), 'A Rationale for Repealing the 1987 Groceries Order', The Economic and Social Review, Vol.30, No.1, pp.71-90.
85